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The June 2024 Price Guide is similar to June 2023, but the multiple for the Investment and super clients (age 80 years+) have increased by 10% to 0.9 times to 1.1 times the annual recurring revenue (previously 0.8x to 1.0x).

Radar Results transactions for the last 12 months show evidence that financial advisers with clients in the oldest age category have received higher prices over the previous 12 months. This may be due to the supply and demand curve, with fewer practices selling or coming to market. The Covid pandemic and changes in regulations (2020-2022) saw a substantial exodus of financial advisers from the industry. Many advisers chose to sell their client lists and associated revenues or their entire practices. This trend wasn’t limited to financial planning but was also evident in accounting and mortgage broking businesses.

However, as the pandemic subsided, the business environment began to stabilise. Transaction activities have since returned to more typical patterns, though the legacy of the pandemic’s impact on supply remains.

Radar Results’ Price Guide has two components: one based on age and one based on the size of the fee paid annually for the ongoing reviews and advice. Buyers and sellers should blend both charts when using the Price Guide to value a business or client register to determine a more accurate calculation.

The fee multiple for the self-managed superannuation fund (SMSF) section has also changed, moving to 1.25 times to 1.75 times the annual administration fee to manage the SMSF. This may include the tax return of the fund and its members. The audit fee is usually charged separately, costing around $400. SMSF administration fees vary immensely, ranging from $1,500 to $6,000 annually, depending on the investment mix.

 

Buyers Focus on Fee Size

Radar Results has revised its Price Guide for financial planning businesses and client books, reflecting the industry’s evolving dynamics. The new changes highlight the growing importance of fee size in business valuations, providing a clearer picture for buyers and sellers.

Key Changes:

Fee Size Takes Center Stage: Over the past year, fee size has become a pivotal factor in determining business value. This shift underscores the need for financial planning businesses to maintain competitive fee structures to attract potential buyers.

Revenue Multiples as a Benchmark: Sales transactions in the industry now predominantly involve multiples of recurring revenue. This recurring revenue comprises risk renewal commissions, ongoing fees for service, or a mix of both. These metrics serve as a reliable benchmark for assessing business value.

Influencing Factors for Multiples: Traditional factors that influence the multiples buyers are willing to pay include:

  • Vendor terms
  • Client locations
  • Client ages
  • Investment strategies
  • Products offered

Emerging Trends:

The latest update reveals a notable trend: fee size now significantly impacts the multiples buyers pay. Buyers are increasingly focusing on two main factors—client age and fee size. This dual approach allows for a more precise valuation using Radar Results’ Price Guide tables.

Practical Example:

Consider a scenario involving a 70-year-old retiree client who pays $6,000 annually in ongoing fees and is based in a Capital City. Here’s how the valuation plays out:

  • Age-Based Table: The multiple typically ranges from 1.9 to 2.5 times. Being in a Capital City generally results in the higher 2.5 times multiple.
  • Fee Size Table: The multiple extends from 2.6 to 3.3 times. Most sellers would anticipate a minimum multiple of 3 times or more.

This example illustrates how buyers can use the Radar Results Price Guide to calculate a blended result for each client, combining age and fee size factors for a comprehensive valuation.

Market Shift Explained:

The reasoning behind this market shift is straightforward. Over the past five years, the costs for financial planners have risen significantly, leading to higher cost-to-serve ratios. As a result, acquiring a client book with fees below the cost to serve is less attractive to buyers. Raising fees early in a new client relationship is challenging, making initial fee size a critical consideration.

In conclusion, Radar Results’ updated Price Guide provides essential insights for financial planning businesses navigating the current market landscape. By understanding these changes, buyers and sellers can make more informed decisions, ultimately driving better outcomes in business transactions.

Bob Blurton – QLD Associate – 0488 403 139 – bob@radarresults.com.au