Business owners frequently ask us “what multiple of income is my business worth?”, or perhaps “what percentage of assets under management could I get for my business?”. With some exceptions around lending business and insurance risk carriers, our response is typically an admittedly somewhat convoluted explanation that valuations are principally earnings driven (or EBITDA to be more precise, which is itself largely a proxy for free cash generation), before going on to discuss the need to “normalise” these numbers and establish a view on the quality and sustainability of earnings. We explain that what matters most to buyers is future earnings and not the past, but that past earnings are usually the strongest piece of evidence in establishing what the future earnings might look like. And of course, it is the earnings in the hands of the buyer that really matters, a number which (typically) a seller will never fully understand. Added to this is a discussion around “debt free/cash free” and working and regulatory capital.
Generally, this is well understood, yet buyers and sellers will still routinely talk about multiples of income. In early stage businesses this is understandable, as they have not yet built up a track record of historic profits. In more mature businesses it is generally more of a shorthand, as with an understanding of growth and margins they can provide a reasonable guide as to what an earnings-based valuation might look like.
The actual EBITDA used in arriving at a valuation for M&A purposes often bears little resemblance to what appears in the statutory accounts. Conversely, revenue is a far firmer number and so expressing an offer value as a multiple of revenue can eliminate the vagaries of EBITDA multiples; in a breakeven business the EBITDA multiple would be infinite.
But when multiples of income are talked about, it can engender the belief that growing the top line – but not the bottom line – will automatically enhance value. The reality is that creating a sustainable high margin business is tough, remorseless work, requiring every aspect of a business to be kept constantly under the microscope. In my experience, successfully achieving high margins can often come down to the willingness to “weed out” unprofitable customers/clients, or charge them more for services or, better still, not take them on in the first place. Businesses that do this invariably have strong pipelines, understand their cost structures and are not blindly chasing turnover. An added benefit is that the less sophisticated competitors are often picking up the lower quality business that has been left behind, tying up significant resources.
Reinforcing the above point, not every £ of profit is worth the same. Buyers do not look to share their synergies with sellers. But a well-managed sales process will force sellers to factor them in to the offer price, in order to be able to table a winning bid. Therefore a £ profit arising from having inherently profitable clients and well-honed processes is more valuable than a £ profit that comes from an industry beating commission rate.
Our involvement will ensure you will benefit from the majority of synergies deriving from the transaction, but we subscribe fully to the old adage that turnover is vanity, profits are sanity (and cash is reality).
Insurance
While the biggest insurance news story in the month concerned an announced transaction that now isn’t going to take place, there was still plenty of UK Insurance M&A activity during July, with 14 transactions being announced, more than twice the number in the same month last year.
The most active acquirer in the month was Global Risk Partners, with (directly and through its owned businesses) three transactions. Prior to the announcement that Aon and Willis had withdrawn plans to merge, GRP announced the acquisition of Willis Towers Watson’s Northern Irish commercial risk and broking business, a £57m GWP portfolio that will be integrated into GRP’s Belfast-based ABL business. GRP also announced that it would acquire Bolton-based High Net Worth specialist Three Sixty Insure, and commercial broker Real Insurance in Mansfield, through its subsidiaries Gauntlet Insurance Services and DCJ Insurance, respectively.
Other consolidators were also active during July, with PIB Group deepening its presence in the let property and tenant referencing market – it acquired market leader Barbon in 2020 – by adding lettings platform Rent4sure. And DR&P Group, the commercial broker backed by Inflexion following a buyout earlier this year, made two new acquisitions, D2 Corporate Solutions, a corporate broker with offices in Glasgow and Manchester, and Smith Robinson, a Chartered broker based in West Yorkshire.
In a somewhat bizarre coincidence, there were two deals in the month for golf-related insurance businesses. Aston Lark announced that it had acquired the Linkscover brand, a golf club insurance specialist providing cover for some of the UK’s best-known clubs. In the same week Lloyd’s coverholder WorldWide Hole ‘N One, a contingency specialist providing cover for, among other things, hole-in-one and associated prizes, was acquired by US-based wholesaler Jencap Group.
In other broking deals, travel specialist Staysure announced that it had acquired ROCK Insurance Group, a travel and gadget business with a strong presence in the affinity partnership segment, Tasker Insurance – whose acquisition by Jensten Group was included in last month’s newsletter – announced that it had acquired Insure Risk, a small commercial broker based in Altrincham, and Character Insurance Brokers acquired both Boothby Taylor in Chelmsford and Kingfisher Insurance Brokers in Westerham.
In insurtech, it was announced that Setoo, an MGA providing a platform for embedded travel and leisure products, had agreed to merge with Pattern Insurance Services, a US startup specialising in parametric insurance. Finally, acquisitive MGA and insurer Accelerant acquired The Underwriting Specialist, a Lloyd’s coverholder based in Hertfordshire and focusing on PI cover.
Investment
July saw two more transactions in the investment platform space, with Lloyds Banking Group acquiring Embark Group for £390m, adding £35bn of assets under administration, and AssetCo striking a £28m deal for a 30% stake in Parmenion Capital Partners. In addition, Australian Praemium was reported to be looking for a buyer for its international business, which includes its UK platform and customer management systems Plum and Wealthcraft.
Consolidation continued among IFAs. Palatine Private Equity exchanged contracts for the sale of Wren Sterling to the management team supported by investment funds affiliated with Lightyear Capital, which is making a majority investment in the firm that is currently managing c. £4.6bn in AUA. Imagine Financial Planning and Forbes Lawson Wealth Management joined Fairstone through its DBO acquisition programme, bringing together combined AUA of around £200m. Close Brothers acquired PMN Financial Management, adding £300m in AUA. Perspective Financial added £350m in AUA via the acquisition of Prolific Financial Services, Evolve Financial Management, Bowman Financial Planning and Quantum Portfolio Management, whilst Team plc announced the acquisition of JCAP Treasury Services for £2.95m.
In the wealth management sector, US investment bank Raymond James made a recommended offer for LSE-listed Charles Stanley for £278.9m. Stonehage Fleming acquired Maitland Group’s private client division, adding £1bn in AUM and £15bn in assets under administration. Bank of Ireland acquired most of the country’s largest independent broker and wealth manager Davy Group for €440m, comprising its wealth management, capital markets and asset management divisions. Separately, Luxembourg-based investor services group IQ-EQ reached an agreement to buy Davy’s Global Fund Management business and Sanlam was reported to have put its UK wealth and insurance businesses up for sale.
Elsewhere in the sector, AssetCo announced plans to raise £25m to acquire a majority shareholding in specialist tracker business Rize ETF. Tech-focused venture capital firm Forward Partners floated its shares on London’s AIM market with a market capitalisation of £134.6m, raising proceeds of £36.5m which it will use to fund future investments. Fintel, the parent company of SimplyBiz, sold its employee benefits platform Zest Technology to FPE Capital in a deal expected to be worth up to £11.5m. The specialist financial services consultancy and systems provider Altus was acquired by Canadian software company Equisoft for an undisclosed sum. Australian technology provider Iress was reported to be in sale talks with private equity firm EQT Fund Management.
Lending
There was significant M&A activity within the mortgage market. Starling Bank announced the acquisition of Fleet Mortgages, a specialist buy-to-let mortgage lender, in a £50m cash and share deal. Athene, a New York listed financial services company focused on retirement savings solutions, announced that it had entered into a definitive agreement to acquire Foundation Home Loans, a specialist mortgage lender, from funds managed by affiliates of Fortress Investment Group. Better, a digital home ownership platform in the US, announced its planned acquisition of Trussle, a digital mortgage broker, facilitating its entry in to the UK mortgage market. RVU, whose brands include Uswitch, Confused.com and Money.co.uk, announced its acquisition of Mojo Mortgages. Lonsdale Capital Partners announced the sale of Charles Cameron & Associates to Socium Group. Foxtons Group confirmed that it was reviewing strategic options for Alexander Hall Associates.
Secure Trust Bank announced two transactions in line with its strategy to focus on specialist higher-yielding lending segments: the sale of its remaining portfolio of SME asset finance agreements and equipment to Haydock Finance; and the sale of a portfolio of mortgage loans to Jacqali Designated Activity, a financing vehicle established by a global financial institution. The consideration for the sale is estimated at £54.6m, payable in cash on completion.
Elsewhere, UK Government Investments announced its intention to sell some of HM Treasury’s shares in NatWest Group through a 12-month trading plan, capped at 15% of the aggregate total trading volume in the company.
*IMAS Corporate Finance LLP has been acquired by MarshBerry.
