The buyer of last resort (BOLR) is a myth. That’s one of the findings of the latest ‘Hypercompetition’ paper fromCredit Suisse Asset Management(CSAM).
Clayton Coplestone, who co-authored the paper with CSAM’s Brian Thomas, says that BOLR is a myth for a number of reasons.
First of all it sets an “artificial” floor price.
“There is a complacency amongst some advisers who think they don’t have to prepare an exit strategy because they have a sugar daddy — a buyer of last resort.”
This, he argues, sets up an artificial expectation.
Coplestone maintains that most BOLR valuations centre around the multiple theory whereby the value of the business is calculated as earnings multiplied by a given number — commonly three or four.
“What advisers don’t realise is that there are a number of fish hooks in that calculation designed to restore it in line with what the market is actually paying,” he says. “And the market is not paying four times earnings, it is probably paying more like 1.2 to 1.8 times.”
The four times earnings figures are available only if certain things are in place, Coplestone says, claiming advisers “can’t help but stumble along the way” in trying to put those things in place.
“The BOLR valuation is therefore a fallacy.”
Coplestone says most of the dealer groups he spoke to said they were not interested in owning adviser businesses, “they only offered BOLR because they knew the dealer down the road offered it”.
BOLR will be sorely tested in the coming months, according to Coplestone, who says March 11 will herald the mass exodus of many older advisers.
“I have it on reasonably good authority that a very large dealer group has 140 advisers holding their hands out for their BOLR cheques and the [dealer group] reserves are just not there to pay them.”
These advisers have done little or nothing in relation to succession planning, believing that the BOLR facility removed the need to do so.
The other problem with BOLR, says Coplestone, is that it does not allow for the partial exit of a partner in the practice — so if, for example, there are two partners in the practice and one partner wants to leave, the practice has to be sold up and all the partners have to leave the business.
Coplestone also thinks BOLR is a poor method of valuation for the buyer because it concentrates on the revenue line and not the expense line.
“When you buy a financial planning business, all you’re really buying is a database — there are costs associated with retention. The cost of keeping and attracting clients these days is going through the roof at a time when revenues have been slammed by markets.”
The revenue model is further flawed, according to Coplestone, because generally speaking a client with $1 million invested is thought to be 10 times more valuable than the client with $100,000.
“The point people miss is that the $1 million client can be more expensive to service — so the net profit is the same.”
Coplestone claims the only true way to value a business is on earnings before interest and tax (EBIT).
“Anyone who can sell on EBIT will get a much better price,” he claims.
“If you want to keep playing by the BOLR rules your complacency will be sorely tested. I encourage advisers to embark on the journey of converting their businesses to a proprietorship, that is, a proper business, so they can sell it on the market on EBIT for what it’s worth.”
One of the first things advisers need to do in order to do that, he says, is to change their remuneration structure to something they have control over, which also takes account of costs.
