Selling Multiples
Insurance registers in high demand
Life insurance registers continue to be in extreme demand from financial planners who wish to expand their business. These registers, commonly called “books of business,” would include life insurance, trauma or crisis cover policies and income protection. To date the main demand has been from capital city based advisers although regional based advisers are also after these types of books.
“One swallow doesn’t make a summer”
Some advisers are now predicting an increase in their recurring revenue of up to 50% for the next few years. It’s nice to be optimistic, but it sounds like 2007 again. It could be a good time to take stock of where your
business is currently, and factor in either no increase in revenue, or a fall in revenue due to market downturn. However, one way to guarantee an immediate revenue increase is to buy a client base, as long as the price is right. But what is the “right price” multiple you should pay today?
Recently there’s been publicity surrounding particular acquisition multiples that have been paid to sellers. This publicity can set a dangerous precedent. Advisers, who may be thinking of selling and feel summers here, could be bitterly disappointed by the end of negotiations! Advisers who have wanted to sell their business in the past have used Radar Results to provide them with an appraisal of what it’s worth. Their own price expectation may be based on a recently published “one off “sale result at a high price multiple. The adviser identifies with this sale price multiple, and expects to achieve the same result. What’s that saying; one swallow doesn’t make a summer?
Possibly the high recurring revenue multiple may be influenced due to exceptionally generous terms offered by the seller, like a 5 year payout term. Or the reverse, 100% upfront payment for your business, no transition work offered and no clawback provision which would make the multiple reduce spectacularly. I recall when Radar first provided appraisals, the price paid by our client reduced by over 20% because he offered a purchase price 100% upfront for the financial planning business.
Setting a high price expectation to attract sellers is almost like a real estate agent desperate get a listing and provides an appraisal that’s totally and commercially unrealistic. At first you believe them, only to find out months later, it’s false. You then find yourself having to accept a far lower price, the salesman still get’s his commission, and he never has to face you (the vendor) again. This isn’t helping advisers leave the industry in a caring and respectful manner. It also can leave the vendor with resentment from being under-valued, and with a bad taste in their mouth thinking they should have got more for their business. If you’d like an appraisal for your planning business or client register, just click on Appraisal Questionnaire.
A well priced financial planning business can sell in a few weeks, or even sometimes sooner. For this to happen you must also be located in an area or region where there is high demand, otherwise you may remain unsold for a longer period. Some banks are still not that keen on providing finance associated with the purchase of financial planning practices, and others limit their lending to 1.5x to 2x the recurring revenue, or 75% of 5x EBIT. These limitations have been in place since early 2009 and make the purchaser provide a higher level of cash or security to secure the finance. This has also affected industry prices.
would be the requirement to buy-out one of the partners. This can stop many buyers from getting past first base.
retention and passing on the cost to the buyer. Not a problem if the buyer needs an office; likes your office and feels there’s a commercial advantage in taking on the lease. However, often buyers already have their own office and only require your client’s revenue to add to their bottom line. Buying the clients is one thing, taking on a lease is quite another. This can be an instant deal breaker.
Radar Results will provide a registered valuer’s report for a flat fee of $2950 plus GST for any financial planning business, pure insurance/risk business, mortgage business, accounting practice or any combination thereof. The valuation can be finalized within a few days if the seller provides timely and comprehensive information to Radar.
The number of financial planners who have approached Radar Results wanting to sell their business has increased by 50% from January 2009. We had 42 practices for sale in January and now have 63 serious sellers. Based on fee revenue and purchase numbers, the last quarter (July to September) was Radar’s best ever result.
financial planning group, helping its advisors achieve their business goals. This included the development and implementation of a tailored and structured Practice Management Program.
Development Manager roles with Great Southern Securities and Norwich Union (Now AVIVA) and administration roles within AMP in both their Head Office in Sydney and their regional office in Toowong in Brisbane.
Planning in 2005. Merv joined Radar Results in 2008, having scaled back his involvement with Capstone.
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. 
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 
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.
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?
