Time to sell?

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There’s really no such thing as an ideal time to sell your accounting or mortgage business, but if you have a financial planning business, now is the time to seriously consider selling. So, why now?

For several years, there’s been a lot of poor media on the planning industry, and with two parliamentary inquiries underway and a third one to start soon, the spotlight on financial planners is only going to heat up.

The educational requirement on planners has always been questioned, and the recommendation from industry associations is that a transition is required. If you don’t want to start a University Degree course or the equivalent, it’s time to retire or change professions. If your business is primarily investment focused with a lot of shares and your adviser service fee is aligned with the accountant balance, be wary of your revenue falling in another share market crash. With the world in political turmoil, October being the worst month for corrections, and after three years of upward share market movement, a downturn is expected. Another reason for planners looking to find a buyer now is finance. Just over 72% of clients signed with Radar Results require finance to buy a business or client register. Shortly after the GFC, you couldn’t get a cent of finance; banks are now nearly giving it away. With rumours swirling of interest rates set to increase and a second GFC on the way, now is the best time to sell.
The change to a fee-for-service model from the commission system will eventually reduce the value of your planning business. Recurring revenue multiples are set to be replaced by profitability valuations. However, the recurring revenue multiples being paid for financial planning businesses and client registers are currently at an all-time high, which can be attributed to the demand by buyers.

Radar Results, Australia’s largest buyer’s agent’s service, has over 200 financial planners and accountants under contract looking to buy businesses. Some have purchase budgets of $5M to $10M, while others want to spend just a few hundred thousand dollars. Cross selling other services, such as tax returns, loans and property sales is also holding up today’s ‘higher than normal’ prices.

The biggest concern I’m seeing is financial planners wanting to sell, but not having the business ready. Many still do not have a ‘press a button’ client list, or are not fully paperless. The old school planner from the life insurance days of the 70’s and 80’s wants to hang on and die with their business. They don’t actually want to die at their desk, they just don’t know how to take that next step.

Where’s the highest demand?

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The financial services sector operates in a number of different areas, and buyers can choose from a number of sectors, such as accounting, SMSF’s, risk insurance, mortgage loans and general insurance.

Next month, Radar Results will produce its ‘6 Monthly Price Guide’ listing multiples that have been paid for these different types of businesses. But leaving multiples aside, which areas have the highest demand? Currently, it’s the high growth areas of Queensland, in particular the Sunshine Coast. Next is Adelaide and Perth, with financial planning and accounting in high demand as evidenced by the prices being paid.

Next is Sydney, specifically the northern suburbs and inner west looking for financial planning books; $150,000 of RR. South Sydney is a key demand area for mortgage books of any size with trails fetching up to two times, and the traditional risk insurance books still fetching 3.5 times if the clients are not too old.

Accounting businesses are required in Sydney’s CBD area, with tax fees commanding $1/$1, or even more.

Particular platforms are also in high demand, like Asgard, Navigator, Oasis, Summit and North. Some of Radar’s clients would pay four times recurring revenue if the age of the clients were to their liking and the location of the clients were geographically suitable.

Since 2011, there’s been 104 practices or books of clients sold through Radar, with a large proportion coming from NSW. While our head office is in NSW, you would expect a more even pattern state by state, particularly as we have had offices in all states since 2011.

State

Number
NSW

42
QLD

27
VIC

13
SA

10
WA

10
ACT

2
TAS

1
NT

0

What’s selling, Who’s buying?

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More financial planning practices and client registers have hit the market now that the Government has clarified grandfathering. In an amendment to the FOFA regulations, the following additional wording now has sellers and buyers very happy, ‘A person who purchases a business has the same rights under this regulation that the seller of the business would have had if the seller had not sold the business.’ Govt Exposure Draft 28 Jan 2014, Item 19.

Sell Buy Merge Experts, Radar Results, received last month 9 new practice listings to sell, virtually ending the drought that started last July.

In addition to an influx of new sellers of financial planning practices, we have seen higher demand than usual for mortgage books, forcing prices up. Recently a seller was offered two times the trail. Irrespective of where your mortgage book is located, Kalgoorlie, Alice Springs, Broken Hill or Townsville, buyers are paying cash 1.5x to 1.8x trail, no questions asked. And it doesn’t matter who is the aggregator.

Accounting practices have continued their climb up the ladder, probably being the second most sought after financial services business (to buy). Sellers in Sydney and Melbourne are the most popular, particularly if they have around $500,000 to $1M in accounting fees.

Corporate superannuation has made a recovery. After multiples had dropped to as low as zero, demand has now picked up, and so have prices. It really depends on who the fund manager is that’s providing the administration service, and which licensee the buyer’s with. Some licensees are paying their advisers, who are qualified corporate superannuation fund specialists, a flat annual fee per member to continue servicing the plan, even though the commission has been switched off. In some cases, the flat fee is higher than the commission that was being paid originally. Hence, multiples have moved up to 1.5x to 2.0x. Depending on the licensee, a buyer of last resort (BOLR) can be offerd up to 3x the revenue.

D-Linked corporate super clients still have some value depending on which institution manages the fund. Some super fund administrators can guarantee the payment of revenue for up to 3 years, or until 2017, at which time commissions must cease.

Queensland is still the busiest state for Radar Results with currently 25 practices looking to sell, followed by NSW with 24, Victoria 10, WA 8, TAS 1, NT 1 and SA 1.