IFA business finance for advice and wealth management firms

Most advice firms now earn a mix of initial advice fees and ongoing advice charges, typically calculated on assets under advice and collected monthly from platforms. Some older books still carry trail commission on pre-2013 products, which tends to decline as policies mature or are switched. Lenders like ongoing charges because they recur and arrive without invoicing, but they know two things can shrink them: a fall in markets, which reduces the asset value the charge is based on, and clients leaving when their adviser retires. Since the Consumer Duty came in, lenders also ask whether the firm can show that the reviews clients pay for are actually delivered, because income that cannot be evidenced is income at risk.

• Buying a client bank from a retiring sole adviser, often the most common deal in the sector.
• Buying a whole firm, including its permissions, staff and liabilities, through a share purchase.
• Succession: younger advisers buying out a founder, sometimes alongside a phased handover.
• Leaving a network to become directly authorised, which brings capital, compliance and PII costs in the first year.
• Annual regulatory costs: FCA fees, the FSCS levy and the PII renewal, which can land close together.
• Growth: paraplanning and administration staff, cash-flow planning software, back-office migration.

This is where advice firm borrowing differs most from other professions. Personal investment firms must meet the financial resources rules in IPRU(INV) chapter 13 of the FCA Handbook, and larger investment firms with MiFID permissions fall under MIFIDPRU instead. Three practical consequences follow.

• Bought goodwill does not count. Intangible assets are deducted when calculating capital resources, so a client bank bought with borrowed money can leave the regulated firm with the debt on its balance sheet and nothing countable on the other side.
• Where the debt sits matters. Borrowing through a holding company can keep the regulated entity's capital position clearer, but the holding company then relies on dividends from a firm that must keep its own capital intact.
• Only some loans count as capital. Subordinated loans that meet the FCA's conditions can count towards capital resources; an ordinary term loan does not.

The FCA has also consulted on requiring personal investment firms to set capital aside for potential redress liabilities, which would make pre-completion capital modelling even more important. Ask your compliance adviser to run the post-deal capital calculation before you sign heads of terms, and build the FCA change in control approval period into the timetable for any share purchase.

Advice firms and wealth managers with evidenced recurring income, a clean advice and complaints history, adequate PII and a capital position that still works after the deal usually qualify, whether they trade as limited companies, LLPs or partnerships. Lenders typically look at:

• Recurring income quality: platform reports showing ongoing charges by client, and how much is legacy trail.
• Client profile: age spread and concentration. A book where a handful of clients produce most of the income is riskier.
• Advice history: past defined benefit transfer advice or other high-risk areas, complaints and ombudsman referrals.
• PII terms: exclusions, excesses and whether cover is in place for the acquired book.
• Key people: whether clients follow a single adviser, and the handover plan with the seller.
• Regulatory returns: the latest capital adequacy calculation and whether the firm has ever been close to its requirement.

Illustration. A firm agrees to buy a client bank for £400,000. It pays £240,000 on completion, funded by a term loan and its own cash, with £160,000 deferred for twelve months and reduced pro rata if recurring income falls. The lender underwrites the £240,000 on the retained income the buyer can evidence, and the buyer's compliance adviser confirms the firm still meets its capital requirement after completion. The figures are hypothetical.

Unsecured working capital for an established advice firm typically takes from a few days to a couple of weeks once accounts and recurring income reports are supplied. A client bank asset purchase usually takes several weeks, mainly because the lender analyses income client by client and the sale agreement and retention mechanism have to be settled. A share purchase takes longest, commonly several months, because due diligence on past advice is deeper and funds cannot be released until the FCA approves the change in control. The FCA has up to 60 working days to assess a complete notice and can pause the clock to ask for more information, so the change in control application should go in as early as the deal allows.

Most advice firm lending is secured on the business and its owners rather than on property. Directors usually give personal guarantees, and acquisition lenders typically take a debenture over the borrowing company, which may be a holding company that owns the regulated firm. Where the debt sits in a holding company, the lender may also want a charge over the shares in the regulated firm or a guarantee from it; ask your compliance adviser how any guarantee or charge given by the regulated entity affects its capital resources before agreeing. Security over client relationships is of limited value to a lender, because clients can leave, so the retention mechanism and deferred consideration do much of the protective work. Our guide to personal guarantees explains what directors are signing.

The main risks are attrition, markets and regulation. Clients who were loyal to a retiring adviser may not stay, a market fall reduces asset-based charges while repayments stay fixed, and an adverse ombudsman decision on historic advice can arrive after completion. Directors normally give personal guarantees. Alternatives include paying a larger share of the price as deferred consideration, selling a minority stake to fund growth, or an employee ownership trust for succession; our guide to funding an employee ownership trust covers that route. Sometimes the right answer is to buy a smaller book first.