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.