Wide disparity in planning practice valuations

Radar Results John Birt Royal Commission FASEA financial planning practices Acquisitions RC the financial adviser standards and ethics authority grandfathered commissions

14 May 2019
| By Mike |
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It is a buyer’s market for advisers looking to grow their businesses through acquisition and they are not particularly interested in lower quality financial planning practices.

That is the assessment of financial planning brokerage, Radar Results with its principal, John Birt claiming there is a wide gap between what buyers are prepared to pay for high quality financial planning practices and those which are considered “conventional”.

In doing so, he said this represented a significant change from the days when the difference in the multiple paid for a high-quality practice and a more conventional business was around 0.5 times the recurring revenue (RR).

“Over the past 10 years financial planners have been able to sell their practices for a RR multiple of between 3.0x to 3.2x and if the practice was considered less than high quality, they would still receive a price multiple of between 2.5x to 2.7x the RR,” he said. “This was because since 2007 it's been a sellers' market.”

“After the Global Financial Crisis (GFC) finished, finance became easy to secure, interest rates fell, sellers were hard to find, and buyers were forced to pay a high price multiple for an acquisition,” he said.

However, Birt said things had changed as a result of the Royal Commission, the Financial Adviser Standards and Ethics Authority regime and an end to grandfathering and that a buyer’s market had emerged.

“Buyers now have a larger selection of sellers from which to choose and therefore, can negotiate lower price multiples and obtain better payment terms,” he said.

Describing what a high quality practice looked like, Birt said 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 would be confirmed at the annual reviews, and the age of the clients was probably 40-65 years and cross-selling opportunities therefore existed.

He said the cross-selling services could be taxation advice, property sales, property rental management, mortgage loan services and SMSF advice and that the clients would all be fee-for-service with no grandfathered (GF) trail commission clients.

By comparison, Birt said a conventional practice would have many geographically spread clients to the number of advisers, have conducted minimum reviews and a less than 100 per cent compliance record with the possibility of missing financial disclosure statements and opt-in documents.

He suggested that such practices might also have a good per centage of grandfathered clients with many of them not engaged and unable to be contacted.

“These practices are now selling for between 1.5x and 2x the RR and the grandfathered clients are selling for between 0.5x and 1x,” Birt said. “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.”

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