Should you merge?

Radar Results has provided financial planners with more than 500 business appraisals since 2006. An analysis of this information indicates that larger practices tend to be more profitable and efficient, with clients paying on average a far higher level of fee. Only those practices that had annual recurring revenue of at least $500,000 were included in the analysis. The larger practices, where total revenue was between $1.5M and $4M, had an average annual fee-per-client of between $5000 and $6000. The results reveal that the fee-per-client for the smaller practices was far lower, between $1000 and $2000.

The results from the analysis may help practitioners plan ahead and measure themselves against the industry average. I’m not saying you should try and mirror the industry average, but at least you should know where you’re positioned and have a plan to exceed this average. I see a lot of inefficiencies in financial planning practices which can be overcome with technology and merging. The number of staff required today to run a good-sized practice would have to be half what it was 20 years ago.
The research showed that the funds under management (FUM) for the practices analysed were on average $192M, with the balance of each client’s account averaging $370,000. The majority of the practices were located in either Victoria, South Australia or Queensland, with NSW contributing only 13% of the results.

The larger practices, with revenue in excess of $1.5M, would usually sell on a multiple of Earnings before Interest and Tax (EBIT), and the highest EBIT within the analysis, as a percentage of revenue, was 59%, with the average being 33%. The EBIT multiple paid today for a quality financial planning business has fallen significantly, probably sitting at around the 4 to 6 times. However, if you can improve the profitability of a practice, then the sale value of that practice today could quite conceivably be the same as it was several years ago; albeit with the multiple falling.

Commonly, there’s too much emphasis on the multiple factor when a practice decides to sell or merge; whereas one should look at the profitability of the practice and, consequently, the value it can add to another practice after it’s merged. Clearly savings on infrastructure costs such as leasing, staff and software can add significant additional profit and, later on, make the new, larger business more attractive as a potential acquisition.
With interest rates moving down over the past 12 months, financial planners can now borrow at rates as low as 7.00% pa to fund the acquisition of a financial planning business. With easier lending criteria and more sellers coming into the market, it’s becoming a buyer’s market. Basically buyers have more stock to choose from. However, there are exceptions to this rule with Perth, Melbourne and some parts of Queensland having very few sellers.

Unlike the period post-GFC when lenders dried up and obtaining finance for acquisitions was almost impossible, many banks today have moved back into this field of lending – the most prominent being ANZ, NAB and St George – allowing planners to expand with confidence, not having to borrow at the previously high rates.

We have recently been approached by a number of large financial planning licensees who have themselves gained funding to assist with the growth of their advisory network. With the help of a tripartite agreement and revenue guarantees by both the bank and licensee, planners can borrow almost 100% of the purchase price of another practice or client register they wish to acquire.
We expect to see many more advisers selling their businesses before 1 July 2013 when new FOFA regulations come into force. There is a belief that the new regulations may have an impact on authorised representatives within respective licensee groups, preventing them from moving to another licensee, unless they want to trigger ‘Opt-in’ for all their clients. In essence, grandfathering could be affected when a client of a financial planner is moved to another licensee, whether it’s by way of a sale to another adviser, or simply a transfer to a new licensee for a better deal.

A survey earlier this year by Radar Results on the acquisition of financial planning practices revealed that the most popular size of recurring revenue sought is between $100K to $250K (39% of 2,488 respondents) followed by $250K to $500K (31%). The appetite to acquire larger practices of $500K to $1M and over $1M polled only 7% each. When you multiply these recurring revenues by a multiple of 2 or 3 times to calculate the purchase price, a loan of between $250,000 and $1.5M would be required to make the acquisition possible.

Price expectation of buyers and sellers

Recently Radar Results conducted a simple poll among the LinkedIn group called ‘Selling or buying a financial planning practice Australia’, and received 103 responses. The single question asked was “What multiple or recurring revenue today would you pay for a quality financial planning (FP) business?” There was a lot of debate over what might be considered to be a quality FP business. Below are the results of the poll.

Multiple of recurring revenue % Poll responses

1.5 to 2.0x 8%

2.0 to 2.5x 43%

2.5 to 3.0x 34%

3.0 to 3.5x 7%

3.5 to 4.0% 8%

Some financial planners said the multiple would depend on whether they were buying or selling; which is an interesting position to take. If they were buying, then they would pay only 2.0 to 2.5x RR; but if they were selling, then they would want a higher multiple. I know it’s human nature to want to have your cake and eat it too, but you can’t have it both ways.

The situation of ‘having your cake as well’ will cause many sales to stagnate. Whilst there may be both a willing buyer and a willing seller, a very wide price-differential starts everyone on the wrong foot. I’m aware of planners who wanted to sell their businesses in 2007/2008 and, as at today, those businesses are still on the market. Both the revenue of those businesses and the multiples they will achieve are now lower. A keen seller could have an offer from a buyer within a week, assuming that they (the seller) are organised and that the sale price of the practice is realistic. A financial planning business will sell easily at a commercially-realistic price, or market price. Radar Results is not in the business of ‘talking prices down’. We are very happy to have our associates around Australia consult in an endeavour to have a commercially-acceptable and happy outcome. I think it’s important that planners realize that, when selling their business to a Radar Results client, the seller does not incur any fees.