Financial planning practices worth 2-3 times recurring revenue: survey
Most planners believe the average financial planning practice is worth between two and three times recurring revenue (RR), according to a survey of planners conducted by Radar Results.
Asked what a practice is worth, just over one third of respondents selected 2 to 2.5 times RR, and a similar number opted for 2.5 to 3 times RR.
From a pool of around 2,400 financial planners, the survey received around 800 responses - around three quarters of which came from the eastern states.
There was still some optimism among financial planners, with 15 per cent indicating a practice was worth 3-3.5 times RR and 4 per cent selecting 3.5-4 times.
Just 7 per cent indicated they thought the average practice was worth less than 2 times RR.
Western Australian planners were more bullish than their eastern neighbours, with one third of WA respondents prepared to pay between 3 and 3.5 times recurring revenue.
Radar results principal John Birt said there had been a dramatic increase in the number of financial planners looking to sell their practice in the first three months of 2012, with the firm's merger and acquisitions division receiving almost 30 requests from planners wanting to sell their practice.
"That's an unusually high level of enquiries," he said.
In terms of payment method, almost a third of respondents would prefer to pay half upfront, with the balance paid over two years, one quarter opted for an 80/20 payment over one year and one in five preferred a 60/40 payment over one year. Just 7 per cent would pay the whole value upfront.
Birt said it was surprising in the current environment that a 50 per cent upfront payment was the most popular, given financial planners over the past five years or so had tended to opt for upwards of 70 per cent as an upfront payment.
When acquiring a practice or client register, the most popular size of recurring revenue was between $100,000 and $250,000 (39 per cent of respondents) followed by $250,000 to $500,000 (31 per cent) and under $100,000 (16 per cent).
Practices worth between $500,000 and $1 million and over $1 million each polled 7 per cent.
Almost half of purchasers would prefer a seller to remain in the business for one year after purchase, 11 per cent said two years, and 6 per cent said three years.
However, 28 per cent would not want the seller to remain in the business at all.
82 per cent of respondents also said that a clawback clause in a contract of sale is essential.
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