Generally, compared to the software industry where we are looking at average multiples of 21-25 times EBIDTA, M&A transactions in the retail FX broker space are showing multiples of 5-10 times EBIDTA at most for the best deals we have seen recently.
Why is there such a dichotomy?
For these reasons, traditional Venture Capital and Private Equity firms do not have much appetite for such investments given the combination of high risk and low return multiples. As a result, FX firms should be looking towards partnering with strategic buyer, typically the larger FX brokerage conglomerates or players from the industry’s vertical.
So, how would you make your brokerage more attractive to a potential buyer?
- Invest in intellectual property (even if it’s a mobile app or a custom-built CRM ,etc)
- Mitigate your market risk exposure by deploying “risk free” models (such as STP) for at least a portion of your business
- Diversify. The retail FX business seems lucrative due to the high margins offered, however, there are downsides as well with the enhanced regulatory scrutiny that comes along with it. FX brokers should potentially consider building out an institutional arm, one with lower leverage, more sustainable volumes and better client retention.
- Mitigate counterparty risk by working with licensed and reputable counterparties that are able to deliver superior value, robust systems and consistent and transparent order execution.
- Invest in financial licenses in reputable jurisdictions.
Investment in FX companies over the last 12 years
M&A activity in the FX sector in 2019
Reasons for intensified M&A activity in the FX sector
While the industry remains extremely lucrative, with average profit margins at 29% (compare that to airline industry with less than 1% profit margins!), it comes with greater risks that many investors may not be willing, or able, to tolerate. But if owners invest extra into reducing operational risks, implementing solid risk management strategies and adding some proprietary technology, to guard against the above, then value will be created for all stakeholders involved.