Lower Valuations of FP Practices

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The investment market downturn for the past year has seen the value of financial planning firms reduce by up to 30%. Last year Radar Results provided 180 valuations for the financial planning industry and the impact of reduced recurring revenues and lower profitability on some firms has been dramatic. Practices with either a high level of risk product renewals or fixed dollar review contracts have weathered the downturn a lot better than pure FUM practices. Those with review fees aligned to FUM are down between 16% and 31%, even after allowing for the introduction of new business. Practices affected the most are those with “geared” clients or who have invested in products and companies that have gone “belly up”. Besides the FUM reducing, the multiples for practices has also fallen. Multiples of recurring revenue are down between 0.25-0.50x and EBIT multiples have fallen a full 1.00x.

The impact has seen some financial planners, para- planners and client admin personnel recently made redundant. New investment business seems to have reduced to a trickle and sellers approaching Radar Results for a valuation has doubled from last year.

Dilemma for sellers

The market downturn presents a huge dilemma for advisers thinking of selling their practice. With valuations now lower, some advisers feel that the market may increase during the coming year suggesting they should hold on and benefit from the possible rise. What if it doesn’t pick up and the market drops a further 20% which many experts are suggesting? What if it plateaus for 5 years? Greenspan’s comment “1 in a century event”, Foxtel commentators saying “even professional investors are fleeing” and business commentators are suggesting 5 years before recovering, doesn’t inspire confidence. With bank cash rates at 8%, a seller could take their equity today and get a guaranteed 16% increase over the next 2 years rather than further erosion of their business. Investors are asking their advisers the very same question today. It’s a real dilemma and forcing those advisers to stay working even though they’ve had enough and are suffering from health problems and stress. The average age of advisers is still increasing therefore more practices are coming onto the market. If you wish to consider selling your financial planning business just click on the link Valuation Questionnaire. Radar Results provide a confidential consulting service to our buying clients.

FPA Sponsors

Radar Results will be attending this year’s FPA National Conference from 20 November as sponsors and will have an information booth in the Trade Expo section. Associates from our Newcastle, Melbourne and Sydney offices will be attending along with principals from our Head Office. Phone me if you would like to meet me at the FPA Conference. Ph 02 4384 5670.

AIOFP Sponsors

 Radar Results are sponsors at this year’s Association of Independently Owned Financial Planners (AIOFP) Conference to be held on the Gold Coast in 2 weeks from now 1st to 3rd October. Matt Taylor from our Melbourne Office and I will be attending the Conference and will be available to meet any Queensland advisers whilst we are there. You may like to discuss the value of your business or consider buying another FP business whilst prices are low.  Email me if you would like to meet for a private discussion about your FP business. john@radarresults.com.au
 

Prices Paid for FP Businesses

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Since Christmas prices paid for financial planning practices have stablised and in some cases, even reduced. The main 2 causes have been the downturn in the sharemarket and a change in supply with more sellers entering the market. Planners who were once considering staying in the industry have now decided to sell and not wait for a market recovery. Selling with lower trails now seems a better option than waitingstressed and not knowing what’s going to happen in the next year or two. A planner’s average age is now nearly 60 and last year 23% of sellers who contacted Radar Results indicated they were selling due to ill health. Many said they were “just burnt out” after 20 years of looking after clients. Basically, they’ve just had enough and would like to either do something different or just spend time with their families.  So, what would you receive today for your FP business?

Prices paid for FP practices – last 5 months 

Radar Results experience shows that larger practices with a sale price of between $1M-$3M and situated in a capital city, will sell for 3.0-3.5 times recurring revenue (RR). Larger practices can also sell on an EBIT mutiple of 4-6 times – which hasn’t really changed. Smaller practices are selling for a slightly lower price multiple of between 3.0-3.2 times RR. We are finding country and regional FP practices tend to sell for an even lower multiple due to their isolation.

GlassesOften a practice will sell the lower end of their client base, commonly referred to as Cs and Ds. Surprisingly these prices have actually increased from around 2.0 times RR last year to 2.2-2.8 times RR now. It’s also interesting to find there’s a lot more of these types of books coming to the market place. Advisers find them easy to transfer to a buyer (usually within 30 days) and the additional capital can be used for an A grade client reward program, new offices or pay off debts. It’s hard to know when is the best time to sell but try and do it while you’re healthy. Remember, 1:4 sellers suggest their reason for selling is burn out or something more serious.   

If you’d like your practice valued so you’ll have an idea of what price to expect, just click on the link Valuation Questionnaire – which will take you 4 minutes to complete. We’ll have a written appraisal back to you in a few days. Any questions just give me a call on 02 4384 5670 Head Office – Central Coast NSW.

Selling your C’s and D’s

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Thirteen years ago I doubled the value of my recurring income in a matter of weeks. After attending a Boot Camp on Financial Planning I was convinced that if I doubled my trails and provided a service to my FP clients equal to the increased trail, I would have a better business. I increased the trails from 0.375% to 0.750% and wrote out to all the clients explaining why. Naturally, I had a few phone calls but only lost one client. Actually it was a client who always complained about fees anyway, so I was quite relieved to see him go. My annual FP trail income moved from $100,000 to $200,000 overnight which allowed me to provide a lavish and pampering client service program. More referrals followed and today that business has $300M of FUM. The FUM in 1994 was zero. If you’d like to read further, I have one other tip on making life easier as a planner.

Getting rid of your C’s and D’s

The same Boot Camp Conference suggested life would be a lot easier if I didn’t have to deal with the C and CalculatorD grade clients. I might add here that my definition of C’s and D’s can be quite different to the industry’s definition. The speaker said to hire a bus, load them all on and drive them down the street to the nearest planner and give them away. I understand what they were saying but it seemed a bit graphic. These days you can sell the Cs and Ds, and sometimes, for quite good money. When I sold mine in 1995 it was such a relief. I could now concentrate on those As, the one’s who pay me the most, appreciated the service the most and referred like minded people. Allowing for execptions D’s refer D’s and A’s refer A’s.  So how do you do it – get rid of your C’s and D’s? It’s all about finding the right buyer and that’s how we can help.

Finding the Right Buyer

MagsearchFirstly, by having your C’s and D’s professionally valued, you’ll then know what price to expect. At least a ball park figure without spending any money – just a few minutes of your time. Radar Results uses many criteria when valuing C’s and D’s, all explained on our website under the Selling a Financial Planning Business tab.

It’s a free service and takes about 4 minutes to complete the online Valuation Questionnaire. We also supply the right buyer and there’s no fee to sell using our service. Any other questions just give me a call on 02 4384 5670.

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FP Practices Sold During 2007

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Last year prices paid for financial planning firms in Australia escalated. Radar Results data for 2007 revealed a high of 5.5 times recurring revenue was paid for a Brisbane CBD practice and a low of 1.8 times for a NSW country practice. The average was just over 3 times recurring revenue. The largest influence on the price paid for a FP practice was it’s location.

Supply of quality practices in capital cities still remains acutely short with Adelaide almost  barren. Perth was not far behind with buyers outstripping sellers 5 to 1.

Melbourne not only has buyers and sellers evenly matched but also had the highest level of activity last Magwithnumbersyear, accounting for over 40% of Radar Results enquiries.

Last year Brisbane started quietly but during the quarter ending December 2007 sellers started coming onto the market. Sydney, which has always been a sought after city for buyers, saw prices escalate rapidly during 2007 due to low supply. The last quarter has seen more FP practices in Sydney move to “sell mode”.

In some instances price differential between country and city prices is almost half. In many country regions there are no buyers at all. I know of practices that have been for sale for over a year and haven’t even received an offer.

Another major influence on price was the size of the practice. FUM of $20-30M were snapped up in a few weeks; $50-100M FUM was much slower with price expectations by the seller rather ambitious. Dealerships of any size were in big demand especially if the total advisers numbered more than 5 and up to 100. Their in-house platform was the driving force behind this demand together with added distribution through the larger network. A possible ASX listing has become a popular strategy together with economies of scale from merging practices.

sellbuyLooking ahead we expect around 2000 practices to change hands in the next 4 years. That’s about 10 a week; many of which may be offered first to staff and management, then the outside market. With the average age of a planner close to 60 and nearly 4 years of sustained share market growth, advisers are starting to lock in the value of their businesses now. As more sellers hit the market and supply increases, prices will fall.

Larger planning practices will benefit from merging with the smaller ones and some will list on the ASX. Eventually the smaller planning practices will basically disappear – similar to the corner store leaving monopolies like Woolworths and Coles to survive and dominate. It should be an interesting 2008.

Radar Results will be running a national business advice seminar program for financial planners “Retire or sea change?”. It will involve how to get your practice ready for sale even if you are 5 years away from that decision. The seminar will also explain what to expect from buyers and answer all those hard questions. To register your interest just click Seminar Registration send an email to Michele Conroy with your name and address and we’ll send you and invite. If you would like a valuation then click on this link Valuation and complete the 4 minute questionnaire. We’ll send you a valuation of what we think your business is worth now. Please phone me if you have any questions on 02 4384 5670.

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