Financial advice practice valuations have been impacted by the proposed Life Insurance Framework (LIF) but risk based practices have retained their value due to high demand from new and existing advisers.
A report released by business brokers Centurion Market Makers found that the LIF changes, as well as the Future of Financial Advice (FoFA) reforms, have impacted valuations for financial advice and wealth management practices over the past five years.
However, life insurance based practices continued to be valued at 2.6 to 3.2 times recurring revenue, similar to smaller mixed revenue financial planning practices which were valued at 2.4 to 3.2 times recurring revenue, but above fee for service practices (without a retail administration platform) that were valued at 1.7 to 2.4 times recurring revenue.
Centurion Market Makers, Chief Executive, Chris Wrightson said life/risk based businesses retained their value as recurring income was easier to grow, compared with investment advice businesses, with risk businesses currently attracting new or younger advisers looking for revenue to grow their businesses.
He said demand remained strong due to a limited supply of practices as many transactions took place within the licence network of the practice.
“There has always been demand for risk businesses compared with investment advice businesses with the same revenue. Investment advice businesses are restricted from growing revenue unless they get new clients compared with writing more insurance business in a risk business,” Wrightson said.
“Risk businesses are currently in high demand from young advisers looking for revenue with many realising it is hard to start from scratch without a risk insurance offering.”
Wrightson said that while LIF and FoFA were impacting prices in some areas there was more transaction activity in 2015 than in 2014, driven by a change in the attitudes of buyers and a greater focus on the age-profile of prospective client bases.
“Buyers now take greater interest in the age-profile of the client base and how the revenue profile of the practice matches the age-profile,” Wrightson said.
“This practice by buyers is driven by their interest to upsell or cross-sell other services and to identify additional revenue opportunities within a client base. There is no science to the way buyers are using this information to assess value, however it is impacting the buyers view of valuation.”
The report stated that during 2014 there were more purchases made by large institutions under Buyer of Last Resort arrangements as well as more sales of exited clients from corporate super plans resulting in accrued default account clients (ADA’s), and small risk client bases.
However, in 2015, the lack of buyer interest in ADA’s resulted in negligible value placed on these client books with younger advisers focusing on smaller books with less than $250,000 in recurring income.
“Many buyers would like to cherry pick books of business to a greater level but it is still a seller’s market but the way books are now being valued is more sophisticated than five years ago,” Wrightson said.
He also stated practice valuations are likely to fall by 10% to 15% over the next five years but would still remain better value than other comparative small businesses when measured by revenue or profit multiples.
“Based on the data in the 2016 report, even with lower valuations, it’s likely financial planning businesses will continue to trade at a premium to many other small businesses and professional service firms.”
“That said, if the generous bank funding terms currently available of 10-years principal and interest were to be replaced with shorter repayment period terms, this would likely impact buyer capacity and current valuations.”
The range where the majority of transactions occurred according to Centurion Market Makers:
Business, Client or revenue type Multiple Range
C and D clients – no ADA clients 1.8 to 2.6 RR*
Exited Corporate Super members (ADA’s) 0 to 1.0 RR
Small FP Practice with mix of revenue 2.4 to 3.2 RR
Risk and super only business / client book 2.6 to 3.2 RR
Fee for service – no retail admin platform 1.7 to 2.4 RR
Corporate Super 0.8 to 1.8 RR
Large FP Practice 5 to 7 EBITDA#
Partial Equity Positions
Minority Equity position in large practice 4 to 6 EBITDA
Majority Equity position in a large practice 5 to 7 EBITDA
* Recurring Revenue
#Earnings Before Income Tax, Depreciation, Amortisation
