RISE AND FALL CLAUSE DILEMMA WHEN SELLING YOUR FP BUSINESS

It has been 4 months since my last Newsletter and since then markets have slipped another 20%, or even more. We now have a full year of downturn to measure past recurring revenue and EBIT values. This will help buyers and sellers of FP firms to know what their business is really worth today. You cannot use recurring revenue in the good years to strike a value on your business today – It just doesn’t work! Until we have moved back into a consistently rising market you have to draw a line in the sand and assess what a FP business is worth on today’s figures.

Many planners feel that markets will increase 20-30% from now. This coincidentally is the same thought pattern they had 12 months ago, 6 months ago and even 3 months ago. This is the theory of an eternal optimist but unfortunately reality kicks in and the buyer of your FP business wants some protection in case markets move down further, even if you think they’re going to go up. As well, clients could leave during the transition period. A seller may like to benefit from a rising market (the optimist) so a suitable rise and fall clause can be used. Should the rise and fall clause be based on market fluctuations, client numbers or both? Sale Contracts reviewed regularly by Associates of Radar Results reveal rise and fall clauses can differ substantially so you should seek advice in this area.

Last year Radar Results provided 180 valuations for the financial planning industry. The measurement of recurring revenue now needs to be calculated before the sale and again after settlement. Sure you need to arrive at a price for the Contract but the actual amount paid to the seller down the track can vary immensely. Recently an offer of 2.8 times recurring revenue (RR) for a FP business (based on the last 12 months RR) meant the buyer was actually paying over 4.1 times RR. You may now have to use the last 6 months annualised or the last 3 months annualised to arrive at a realistic RR value. Or, just leave it up to future income streams of the business and have a long payout period. It’s a dilemma.

Recurring revenue (RR) multiples have fallen further since September 2008 (my last Newsletter) and are now between 2x and 3x RR while EBIT multiples have steadied at between 4 to 6 times. If you would like a confidential valuation of your planning business, contact our Head Office on PH 02 4384 5670 or click on the Valuation Questionnaire Tab on the left. 

Dilemma for sellers – client loyalty and over supply?

If you didn’t sell your FP business last year, when should you sell? A year or two from now could be even a worse time to sell your FP business if by Christmas unemployment in Australia and overseas reaches 10% and the sharemarkets move down another 20%.

All of this unrest will really test client loyalty and retaining clients during a sale process will become more difficult this year and even more dangerous in 2010.  Changes in dealership, adviser and even changes in the office location might be just a bit too much for some clients. They may stay loyal for 1 year of unrest but maybe not for 2 or 3 years if the bad news continues. Another valid reason for selling now rather than later. The financial planning industry, as I knew it, has been decimated and it could take up to 5 or 10 years to recover. With the average age of planners nearing 60 years old, you should ask yourself “just how long do I hang on for?”

We have seen the largest downturn since the 1930’s and the winners will be those planners who are cashed up and know that they are now in a Buyer’s market. They can borrow at 5.6% (interest only) and acquire as many planning registers as they like. When could you in the past borrow at a commercial interest rate of 5.6% and acquire quality assets such as financial planning firms? Answer: Not in my lifetime.

The average adviser’s age is still rising and more FP practices will come onto the market forcing prices down even further. I would suggest that in 2 -3 years from now multiples paid for recurring revenues could average below 2 times based on supply and demand.  If you would like a confidential valuation of your financial planning business just click on the Valuation Questionnaire Tab on the left.

Radar Results provide a confidential consulting service to the financial planning industry.

FPA Sponsors 2008

Radar Results sponsored last years FPA National Conference and received overwhelming feed back from planners and also from other Sponsors. We look forward to this years event and a number of our Associates attending.

AIOFP Sponsors 2008

Radar Results sponsored last years Association of Independently Owned Financial Planners (AIOFP) Conference held on the Gold Coast. E-mail me if you would like to meet a Radar Associate in your area for a private discussion about your FP business. john@radarresults.com.au or phone me on PH 02 4384 5670.