Sunday, September 24, 2023

Financial Services Trends: The Evolving M&A Landscape -Dlight News

When it comes to trends in the financial services space, the evolving M&A landscape is a key part of the discussion as it has become more complex for both buyers and sellers. But with change comes opportunities for those looking to complete a successful transaction.

Let’s take a look at some of the M&A trends that have emerged over the past year and how they could impact buying or selling your business.


The ratings remain consistent

Regardless of which side of the transaction you are on, it is important to understand the value of the company. The first step in the assessment process is to look under the hood: examine your cash flow and expenses. Do you know what you are acquiring? How will you pay for the practice without impacting your current source of income?

With little or no slowdown in deal flow across the industry, we didn’t see any major shifts in valuation metrics either. Composed primarily of recurring revenue, practices have been sold for around 2.5x to 3x, with multiples being even higher depending on the competitive nature of the deal (according to 2021). SRG data).

However, note that it is the levers behind the multiple that are driving it. In other words, focusing too much on the multiple itself doesn’t tell the real story. For example, you should look at wealth concentration, customer demographics, and customer relationships across generations. All of these factors affect the value of the practice.

With several legacy practices up for sale (both within the Commonwealth and nationally), some one-off earnings are also likely to be included, with the multiplier remaining constant at ~0.8x with an average mix of ~2.15x. No matter where you are in your business lifecycle, it’s important to understand the value and drivers of optimization that will benefit you in the long run, no matter what side of the table you’re on.


Sellers want to exit on their own schedule

Not all sellers want to exit immediately after they retire. We have seen sellers in Commonwealth businesses retain their license for an average of two years before officially retiring. Some prefer to remain in an office for a few years, either to obtain additional infrastructure support or to complete a partial sale while continuing to manage the rest of their book independently.

Sellers who want the ability to exit the company on their own terms and schedule should start planning for their retirement at least 10 years in advance. This time can be used to strategize and negotiate a seamless exit, preparing clients for the next generation of advisors who will carry on their legacy.

Here it is important to note that if a seller decides to remain with the company, this can mean a significant advantage for both the buyer and the seller: customers are assured of continuity and a trusted partner for future cooperation. Since customer retention is a key factor in successful acquisition, this method has resulted in higher customer retention and overall satisfaction.


Terms and Conditions Reign Supreme

In a highly competitive environment, terms and conditions often take precedence over everything else.

role of buyer. As a potential buyer, you should ask yourself the following:

  • As a buyer, can you comply with the seller’s wishes?

  • Do you have the capital support the takeover?

  • Is the seller’s customer service model similar to your company’s service model?

  • Have you analyzed your book to understand where the cash flow lies and what size practice your existing infrastructure can support?

  • Do you have a clear acquisition strategy to share with a seller?

  • Remember that organic growth comes with acquiring customers. How does that fit into your inorganic growth strategy?

All of these points are critical when submitting letters of intent outlining your proposed terms.

When considering a purchase, it’s important to find a financing solution that works for you. Visit the Entrepreneurial Capital page. Learn how Commonwealth supports our consultants’ strategic growth goals.

Down payment. Typically, deals always had a down payment of around 30 to 50 percent, with the rest paid out by promissory note, revenue share, or a mixture of both. However, buyers who are in a competitive environment, both within the Commonwealth and nationally, have seen increases in deposits hovering around 50 percent or more. This increase poses a higher risk for the buyer as it is a cash payment up front and is not included in a possible accrual.

Deal Adjustments. When it comes to lookbacks (an adjustment to the final purchase price or promissory note at a specified point in time), 10 percent has been and still is the industry benchmark. This number could be based on assets, income, or households, although the most common lookback structure remains assets and income. Additionally, it can be structured to provide both downside and upside protection.

role of the seller. Equally important for the profitability of the transaction is the clear definition of the role of the seller. Will the seller support the transition effort? If so, in what capacity? How often? And if you’re a seller, have you thought of a strategic plan to ensure you don’t sell your practice at the last minute? Are you preparing your clients for your eventual exit and positioning them to continue to benefit from your successor’s support?


Virtual environments expand the possibilities

One of the positive trends in the financial services space that has emerged in recent years is the transition to a virtual or hybrid work environment for many. Because of this shift, sellers have become more flexible when it comes to considering buyers outside of their immediate geographic location. Additionally, customers are now more accustomed to meeting virtually, giving sellers a chance to meet buyers across the country. In addition, more and more buyers are willing to set up satellite offices to acquire practices or take over leases from existing sellers.

It should be said that competitive location is still an important factor in the overall M&A landscape. But the accessibility of a virtual work environment on both sides was a key to success for the buying and selling practices.

One size doesn’t fit all

There is no one-size-fits-all M&A deal, and qualitative elements tend to outweigh the economics of the deal. Nevertheless, with increasing awareness of M&A – and with a third of the consultants He is expected to retire in the next decade – it’s important to keep up to date with prevailing trends in the financial services space and to understand the needs of both parties in order to seize the opportunity when the time comes.

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