Advice Business Values ‘Softening’


It appears a variety of factors are at play in the softening of values of financial planning practices, with the main impact still that of the Banking Royal Commission report and the impending banning of grandfathered trail commissions.

A price guide newsletter from Radar Results notes the impending banning of grandfathered trail commissions from Jan 2021 has had an immediate impact with as much as 25 percent of the recurring revenue from some practices disappearing.

“The strategy of moving these grandfathered clients to a fixed fee type client can be time-consuming and problematic, but not impossible,” the company’s principal, John Birt, writes.

He says the coronavirus has “…not seen any substantial change in valuation multiples, whether it’s a multiple of normalised EBIT or recurring revenue.

“The sharemarket crash of Feb-April 2020 has seen values diminish where the fees are connected to the Funds Under Management (FUM). Some practice revenues are down between five percent and 20 percent depending on the client’s exposure level to shares.”

The newsletter also notes that Radar Results’ consultants around Australia have reported that “… price multiples being paid for financial planning practices have softened due to the attitude of buyers in the current environment”.

It says that another factor that has lowered planning practices values is the number of sellers compared to buyers.

“It’s a buyers’ market and has been that way now for about 18 months.”

“There have been thousands of planners either sacked, told to move to another licensee or given a Buyer Of Last Resort (BOLR). Further, many don’t wish to do the FASEA exam, and certainly, they don’t want to commence a 4-year University course. With the average age of planners estimated to be 60 years or over and [having] started their careers and businesses 25 to 35 years ago, many have had enough and wish to either retire or have a sea-change,” it states.

The newsletter also outlines the Recurring Revenue Multiple for risk books:

  • Risk clients (under 55 yrs): 2.2x to 2.7x (Previously 2.3x to 2.8x)
  • Risk clients (aged 55 – 60 yrs): 2.0x to 2.3x
  • Risk clients (aged 61 yrs+): 1.0x to 1.5x.

The company says the multiples can vary depending on the terms offered by the vendor, geographic location of the client, age of the client and the investment products within the client’s portfolio.

“Multiples paid for risk books or insurance revenue-based practices will vary depending on the client’s occupation, size of premium, type of policy (stepped or level) and geographic location of the client. The multiples displayed above are for high-quality risk clients.”

It says its table is based on market activity over the past eight months to May 2020.