Financial planning valuations – History is not a good guide

Past sale prices of financial planning practices are really not a good indicator of how much you should pay for them in the future. The past is the past, and if someone paid 3x, 3.5x or even 4x, the recurring revenue (RR) for a business previously, what relevance would that have for today’s purchaser? Very little, I would say.
Planners have tended to look at past transactions to guide them for the future. If, in 2007, you purchased a FP business at 3.5xRR, and the RR of the business halved during 2008/09, you will have ended up paying 7xRR.
Towards the end of the GFC planners thought they could acquire a FP business at a bargain price. They paid RR multiples of around 3x or more, hoping revenues would double and therefore halve the RR multiple they had paid to, say, 1.5x. This didn’t quite happen, but some planners did pick up bargains and, from March 2009 onwards, some made nice recoveries.

Looking to the future. What prices are planners asking for their financial planning businesses today? Through Radar’s marketing, we have developed a summary of nearly 100 practices wanting to sell. Approximately one third of these practices do not provide a clear sale price, but simply say ‘price and terms negotiable’.
The balance are asking for between 2x and 4xRR; however their asking price averages out at 2.79xRR. Larger practices, which ask for a multiple of EBIT, were excluded from this exercise. Note that 2.79xRR was the asking price, the eventual sale price being somewhat less.
Sale terms will also change, from the seller requiring only a 20% clawback to meeting half way at 25-30%. Instalment payment terms will also alter during the sale-negotiation phase, possibly ending with a final instalment after 1 year; whereas the purchaser may have originally required 2 years.
In the future, I see accounting sale multiples blending with FP multiples and moving away from the ‘recurring revenue scenario’, which has existed for the past decade. Looking ahead, total revenue and EBIT will form the new valuation methods. The larger practices and institutions will consume the smaller players, and RR valuations will disappear.

What should you pay for a financial planning business?
Based on acquisitions made by clients of Radar Results over the past 4 years, it’s apparent that risk insurance portfolios are ‘king’, followed by accumulator client registers. The perceived value of the portfolios of older investment clients, many of which were ‘smashed’ during the GFC, is certainly not as high as it once was. A reducing investment-account balance, as retirees live off their money, together with a lack of cross-selling opportunities, has seen them fall from grace. During the 1980s and 90s the retiree market was sought after, due to the easy servicing of their portfolios; they were always on holiday and never annoyed you.  
Today buyers are more cautious, and if they are going to pay 3xRR for a business then it needs to perform. The ability to increase the revenue by selling aligned products, a better value proposition through IT enhancements, and reduced expenses from dealer’s fees, have all encouraged quick growth by acquisition. Adding a $400K book to your business can instantly increase the bottom line by $300K.  So, at the right price, why wouldn’t you do it?

An indication of FP prices today:-         

                               City           Regional

Retirees                     2.5x               2x
Accumulators             3x                 2.5x
Risk clients          3.5 to 4x          3 to 3.5x
SMSF any age        3 to 3.5x        2.5 to 3x
Corporate super      1 to 2x         0.5 to 1.5x

The multiples above can vary depending on terms offered by the vendor, actual location of the clients, client ages and the particular investment products recommended.