May 13, 2019
Radar Results says advice business valuations are heading south during a period where the gap between the value of ‘quality’ and ‘conventional’ advice businesses is growing…
…since 2007 it’s been a sellers’ market
The firm, which specialises in facilitating the buying and selling of financial services advice businesses, says that over the past ten years financial planners have been able to sell their practices for a recurring revenue multiple of between 3.0x to 3.2x. The broker also noted that if the practice was considered ‘less than high quality’, they would still have received a price multiple of between 2.5x to 2.7x recurring revenue: “This was because since 2007 it’s been a sellers’ market,” says the firm.
The Radar Results statement released this week, however, notes that higher-quality advice businesses are now selling for between 1.5x and 2x recurring revenue, while conventional advice businesses are selling for between 0.5x and 1x recurring revenue multiples: “Therefore, the difference today between the valuation of a high-quality financial planning practice compared to a conventional one is possibly up to 1.5x the RR.” The broker noted that prior to 2018 this valuation differential would have been around 0.5 times the recurring revenue.
…now it’s a buyer’s market
The broker outlined a series of factors that has led it to declare that times have changed “…and now it’s a buyer’s market.” These factors include:
- Finance is now harder to obtain
- The Banking Royal Commission has forced multiples down for conventional practices
- There are many more advice businesses for sale, and in a related point:
- Higher educational requirements are forcing planners to retire earlier and consequently, sell their practice
According to Radar Results, buyers now have a larger selection of sellers from which to choose and can therefore negotiate lower price multiples and obtain better payment terms.
It has also outlined the characteristics it attributes to what it refers to as ‘quality’ and ‘conventional’ financial planning practices:
‘Quality’ Financial Planning Practices
- All clients would have an annual fee level of between $3,000 to $8,000
- Each adviser would manage approximately 100 clients located in a capital city
- Opt-in is confirmed at the annual reviews
- The age of the clients is probably 40-65 years and cross-selling opportunities therefore exist.
‘Conventional’ Financial Planning Practices
- Would have many clients compared to the number of advisers, possibly 1 adviser and 1,000 clients with 300 clients considered active
- Geographically, the clients would be spread across a large area
- Minimal reviews are conducted and the review program may be sporadic
- Compliance is probably not 100%
- There may be missing Financial Disclosure Statements and Opt-In documents
- Clients would have small account balances and low annual fees of between $500 and $1,000, or even less.
- The practice may also have a good percentage of grandfathered clients, possibly up to 20% of the client base and that many of the grandfathered clients are probably not engaged and cannot be contacted