When the first wrap service was launched in the UK in 2000 it caused a shift in the remuneration structure of many financial advisers. Over the preceding decade or more, the introduction of trail commission had meant that few advisers were by then without any form of recurring income. But the wrap service introduced one seismic change – the recurring income would henceforth be paid to the adviser by the client and not the product. At the same time there was a growing interest in valuing the business on a multiple of that recurring income. Would it be two and a half times, three times, etc?
There have been further changes in evaluating businesses since. These changes have been brought about largely by the events of the last five years. The outright sale of an IFA firm was seen as the icing on the cake (in capital terms) when added to the pension pot accumulated by the owners. Two things have changed. Firstly, the 10% assumed growth rate on the pension fund and 10% annuity rate for a male aged 65 now belonged to a golden past as did the anticipated yield from the proceeds of any sale.
A further cause for advisers to re-examine their exit from the business was that aged 60 or65 didn’t seem so old anymore as it had done when the individual was 45. Advisers who had been using wrap services for a number of years found that life was not so bad when much of the administrative hassle was removed. At the same time, the value of the recurring income within the business had grown to a level that enabled the owners to enjoy a lifestyle that was not likely to be sustained by the pension plus yield from the sale proceeds.
Finally, the fear that clients might not get the service from an acquirer that they had become accustomed to receive became a factor in wanting the business to continue as it was.
So we have seen in the last few years a willingness to consider alternatives to an outright sale of the business. Usually this will involve taking a longer term view, identifying individuals within the business to whom shares in the firm can be sold. Such transfers are unlikely to made on the basis of length of service but rather whether the individuals share the same values as the founders and are ambitious to drive the business forward. This I call building a legacy business.
One of the drawbacks of this type of business development can be the difficulty of creating liquidity in the shares of private (unlisted) companies. This difficulty can be a deterrent for younger members of staff to invest in an equity stake. If the only sure way to see an exit is for the business to seek a listing for its shares this may be an unreasonable expectation bearing in mind the cost of even an AIM listing and the cost of maintaining it thereafter.
In 1980, in an effort to encourage investment in SMEs a new rule was introduced by the London Stock Exchange, 163(2) USM, which enabled trades between willing sellers and willing buyers on a matched bargain basis. By 1986 the shares in 160 companies were being traded under Rule 163(2).
The recession of the last 5 years has brought about a renewed interest in entrepreneurs. This is being encouraged by the present government. As financial planning firms grow, merge or acquire, the need for investors to be able to trade their shares on a matched bargain basis will also grow. Asset Match was established as a platform on which to allow trading in the shares of private companies. In November 2013, there was a successful auction in the shares of one unlisted financial services company. Auctions in the shares of this company are now likely to be a monthly event. Early indications are that other financial service companies, including financial planning firms, will follow suit.