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Fairstone builds national business with Downstream Buy Out strategy

Fairstone Group helps firms to grow in value before buying them and targets principals who want to sell but stay on in the business. It may be an unusual acquisition strategy but there’s sound logic to it, as CEO Lee Hartley explains to ABR editor Rob Kingsbury

Fairstone Group has acquired or part acquired 34 advisory firms since 2011. Having established itself as a whole of market IFA business in 2009, the group raised second stage external financing in 2011 with the aim of moving the business from organic growth to acquisitive growth. It has since rolled out an acquisition strategy targeting specific types of firms and principals with specific aims. This has given the group a national advisory business of 230 advisers, 58 non-advisory staff, with influence over some £5bn in funds and a turnover of £30m a year. In July 2015, Fairstone Financial Management and Fairstone Financial Management (City), both part of the group, achieved Corporate Chartered status.

Yet so far the group has fully acquired just four firms – it holds a minority stake in the remainder, with contracts in place to fully purchase the business in a stipulated time period, normally between two and four years.

Downstream Buy Out strategy

Lee Hartley, CEO of Fairstone Group (pictured), explains that this acquisition strategy, which is noticeably different from others in the market, came out of the rounds of financing the group went through to build the business. “While third parties could fully understand and support the operational and technology strategy we put in front of them, it was the purchase of advisory firms based on the ‘promise’ of them being good businesses in the future that they couldn’t buy into,” he says.

Screen Shot 2015-07-16 at 14.22.00Hence, Fairstone devised a new strategy, the Downstream Buy Out scheme. After the firm takes the minority stake in the business (typically 5% upwards) it provides the infrastructure and incentivises the business to grow its profits and recurring income to create a more profitable and valuable proposition. “We want as much of the equity as possible lying in the business owners hands up until the point that we fully acquire the business,” Hartley says.

The adviser firm is incorporated as a trading entity of Fairstone and will use Fairstone’s proprietary operating system, which works from front-end marketing through to back-office servicing, creating immediate efficiencies and cost savings, Hartley says. The group will absorb PI insurance costs, the FSCS levy, FCA fees, and cover Capital Adequacy requirements. It will also provide funding for firms to buy client books, bring on more advisers or merge with other small local practices. “We will take away the regulatory and compliance headache, we’ll give them access to new customers, we’ll help reactivate orphan clients, we’ll give them phased in paraplanning so they can blend out their paraplanning costs. We’ll also offer the opportunity to centralise their administration, case management and back-office with us at a monthly cost of £500 a month.

Screen Shot 2015-07-16 at 14.22.08“We want them to grow so they are fitter and healthier businesses before we buy them outright. We will end up paying a premium for the business two to four years down the line but we know we are buying a fully integrated business that we have helped grow and in which we can see the potential for further growth. It’s a sound investment in which we have done the hard work first. For us this is a far more efficient and profitable way to acquire than buying earlier without fully knowing the firm’s prospects,” Hartley says. “With consolidation, success is not in the acquisition, it’s all in the integration. If you get that right it works for everybody.”

The strategy “has been the single best decision we have ever made,” he adds. “We have critical mass, we’ve proven all parts of the model and we’re moving into a more mature phase as a business, which is reflected in the chartered status.

“Our headline revenues have grown by 55% per annum and the organic growth through the improvement to efficiencies of the firms within our framework has been 17% year on year.”

Target adviser firms

Also in contrast to other acquiring companies in the market, Fairstone is targeting firms where the principal wants to stay on in the business. “We’re looking for businesses where we think their future is brighter than their past and where the principals are looking for a capital event and not an exit event,” Hartley says. “Many adviser owners are still advising some clients so they are still contributing to revenue, as well as managing advisers, recruitment and sales. More often than not we want advisers to continue to do that and we pre-agree the remuneration, whether on a salaried basis or part salaried/part revenue-share of the business. That way everyone knows what’s in it for them.”

Screen Shot 2015-07-16 at 14.35.14He adds: “We’re looking for firms that don’t want their clients to be commoditised by being pushed into a restricted environment or a single platform model. We make sure the business owner’s and the underlying advisers’ interests are aligned, we migrate customers to our proposition, and we get two to four years to work with the partner firm before the buyout to ensure the right fit.”

Hartley says the group is looking at quality advisory firms with over £0.5m turnover but is currently dealing with firms of £1m turnover or more. “It depends on the firm; a firm with £0.5m in turnover that, through achieving greater efficiencies, could grow by by up to 50% a year over the next few years, might be more interesting than a firm with £1m turnover and potential for only 10% growth.”

Summarising he says: “What we want are small businesses that have the appetite to grow but not necessarily the tools to do that themselves and who want to maximise their value.”

The group looks to complete at least 10 Downstream Buy Out deals a year. Typically, cash payouts occur at three stages: completion, 12 and 24 months.

Fairstone Group facts and figures

Founded: 2007

Headquartered: Newcastle

Started acquiring: 2011

Number of advisers: 230

Back-office and paraplanning staff: 58

Number of clients: 30,000

Funds under influence: £5bn

Turnover: £30m

(Source: Fairstone)

Fairstone’s backers

The group is backed by 5 separate investor groups and venture capital organisations:

Committed Capital Ltd (London)

NorthStar Ventures

Northern Enterprise Ltd

Altana (Monaco based investor group)

Geneva based family office

Visit Fairstone website

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