This is the last Blog in our 5-part series on “What’s your practice worth?“. If you have missed the others, you can read about it all by downloading our guide here.
Calendar year 2020 was dominated by COVID and the ongoing expected regulation changes from the Royal Commission (RC) and its impact on the industry. Calendar year 2021 has continued that trend.
Our view of the marketplace for buying and selling:
- Buyers have become more discerning. There are enquiries for ‘the perfect book’ multiple times a month – but there is scarcely a ‘perfect book’ for sale.
- Grandfathered Commissions are now gone with these dropping off at the end of the 2020 calendar year
- Buyers are acting in a very sophisticated manner and stratifying client bases when developing offers such that they will only pay high multiples for high value clients. This means the average for the book can drop, but high-quality clients are still demanding around a 3x recurring revenue multiple.
- The effect of averaging is the key driver of reduced valuation. What this means is that the relative amount of “low margin” revenue i.e. clients with fees less than $3,000 are less attractive to buyers as the level of work required significantly reduces profitability.
- Regional Assets continue to achieve lower prices simply due to the lack of market tension from multiple buyers
There has however been some balancing of the market as follows:
- The market has held the value of clients with a fee structure above $3,000 with a comprehensive compliance regime attached. These fees, with appropriate FDS and/or Opt-in are the most attractive client style, and we could sell dozens of these books a year. We expect this style of client book to hold value over time.
- Education standards and the FASEA exam deadline during the year, will see an increase in advisers exiting and we expect some will be single owner businesses that will seek to sell. We expect enquiries in this respect to pick back up closer to the cut off date for non-university qualified advisers. We caution advisers in this position that a rush of books onto the market at a time where there will be far fewer buyers will attract lower prices and leave some advisers without a solution. A planned process to exit the industry is always preferable, and leaves advisers with more options than a rushed exit.
From discussions with practice owners, other market participants and transactions Centurion has advised on, we observed the following offered or transacted ranges of multiples for trade sales for the 2020 calendar year (RR is annual recurring revenue):
|BUSINESS, CLIENT, OR REVENUE TYPE:||Multiple Range|
|FP Business co-located with buyers business||2.2 to 3.0 RR|
|Risk and super only business / client book||2.0 to 2.7 RR|
|Mortgage Broking||1.25 to 2.5 RR|
|Large FP Practice – no co-location with buyer||5 to 7 EBITDA|
|Client fees less than $3,000||1.0 to 2.2 RR|
|Client fees above $3000||2.7 to >3.0 RR|
|PARTIAL EQUITY POSITIONS|
|Minority Equity Position in a Large Practice||4 to 6.5 EBITDA|
|Majority Equity Position in a Large Practice||5 to 7 EBITDA|
Notes: For the purpose of understanding the above, an FP Business co-located with a buyer’s business is one of the most common transactions within the industry and the co-location of the acquired business with the purchaser’s business makes the measurement of profits of the acquired business complex given the co-location and sharing of infrastructure and resources. Thus, the offer and transaction are most often structured using recurring revenue.
During 2020 there has been unmistakable evidence that assets in regional areas attract lower valuations than like businesses in major cities. This is clearly a function of supply and demand with fewer buyers in regional areas, however, there is an occasional exception. We note that most larger acquirers of financial planning businesses are still interested in practices that exist in ‘regional centres’ – that is within a 1-hour flight of a capital city, having a major hospital and/or with other services.
Valuation for partial equity positions in large practices can reflect internal succession planning where a small amount of equity may be discounted for long-term or key employees.
We started this 5-part Blog series by asking “What’s your business worth to someone else?” If you are considering a transaction or buying a business and want to know what the market is for an asset, we can assist with a valuation of your business or one you are purchasing. Click here to get started.
If you haven’t got a copy of our guide, then click here to download.
Centurion Market Makers is a wealth management industry expert providing business broking services to owners of financial planning businesses, and specialist business advisory services to large practices and licensees. If you’re planning on selling your firm in 2021, we’d love you to call us at 1300 766 156 for a confidential discussion or continue browsing our website for more tips, tools, and info on the steps to take when buying or selling your financial planning firm.