Kenyon Prendeville positive about valuations

Financial planning practice brokerage Kenyon Prendeville is positive about valuations, although any value of the practice would depend on its fundamentals, according to principal Alan Kenyon.

Responding to comments made by buyer’s advocate Radar Results yesterday, Kenyon stated that Kenyon Prendeville’s data collected from 150 transactions and based on the 33 transactions currently being processed showed that valuations were higher than stated by Radar Results, and there was little difference between city and regional valuations as they depended on fundamentals rather than where the business was located.

“Our experience, even in a distressed sale situation — for example a business that had been forced to sell by a bank — is achieving at least 2.75 times recurring revenue or greater,” said Kenyon.

Kenyon agreed that risk insurance businesses were priced at a premium coming off the back of the global financial crisis (GFC), but that this would change as the market changed.

“Certainly four times recurring revenue is at the top of the market, however we haven’t seen any price differential between city and regional areas,” he said. “Currently we have offers on a regional risk practice of 3.8.”

Kenyon disagreed that retired investment client businesses were the least valued, adding that “there are still opportunities and they are still the easiest clients to manage”.

“Most advisers’ clients who are retired and utilising their superannuation investments to supplement their income are mostly in ‘minimum draw down’ phase and therefore in reasonable markets — pre and post GFC — still have assets that are either maintaining their real value or are increasing,” Kenyon said. “The retiree sector is also deemed to be relatively passive and therefore likely to be more profitable than the accumulation market, and for these reasons are in high demand. Smart advisers are also seeing a huge opportunity in this market segment to market to the ultimate beneficiaries — the adult children — thus ensuring continuity of a client. Our average prices for these businesses have been 3.35 times recurring revenue.”

Kenyon said that the recurring revenue model was unlikely to change where businesses were acquired and integrated into the buyers’ businesses.

“For most practices under a sale price of say $3.5 million, a purchaser could buy an unprofitable business because he or she will move the acquired business into their own. When a purchaser doesn’t have to inherit the big city premises and not all of the staff it is an exercise of ‘what does the inclusion of the acquired business, clients and revenues contribute to the purchasers bottom line?’ — and hence the reason for recurring revenue multiples being the most used methodology.”

Kenyon stated that it was still a sellers market because little new business was being written post GFC.

“The revenues generated in the past from new business have generally been the difference between making a profit or breaking even,” he said. “Therefore growth by acquisition has been a greater focus by many in an endeavour to restore former profits.”