Radar’s six monthly price guide

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An indication of prices as at January 2015

 

Revenue Type Recurring Revenue multiple
Investment and super clients (age 75 yrs+) 1.0x to 1.5x
Investment and super clients (age 65-74 yrs) 2.0x to 2.5x
Investment and super clients (age 30-64 yrs) 2.5x to 3.5x
Investment clients on Platforms with ‘high’ MERs# Up to 4.0x
Risk clients (age under 50 years) 3.0x to 4.0x
Corporate super clients 0.5x to 1.0x
Cs and Ds (investment and risk) 2.0x to 2.5x
General insurance 2.0x to 2.2x
Mortgage clients 2.0x to 2.5x
Accounting fees – Fees on non-business clients ie individual returns, is generally lower 0.3x to 0.6x 0.9x to 1.2x

 

The multiples above can vary depending on the terms offered by the vendor, actual location of the clients, client ages and the particular investment products recommended. In relation to multiples paid for risk books or insurance-revenue based practices, the client’s occupation, premium size, policy type and insurance companies used are all critical factors. The multiples displayed above are for high-quality risk clients. # Management Expense Ratios (MER) can vary from platform to platform, however, 2% per annum before adding buy/sell spreads and adviser fees would be considered ‘high’.   

The table above is based on market activity over the past six months to 31 January 2015.

The multiple of recurring revenue paid for a financial planning register can vary depending on terms offered by the vendor, location of the clients, age of the clients and the investment products which had been used previously.

The multiple paid for risk books will vary depending on the size of the sum assured, the premium and how it’s paid, the insurance company (product provider), whether the insurance is hybrid (combination of stepped and level premiums) and whether the insurance commission accepted by the adviser was all paid up-front.

The multiple paid for mortgage book trails will vary according to the size of each loan, the occupation of the borrower, whether the loans were written as variable or fixed, age of each loan and who’s the aggregator.

The multiple paid for a general insurance register depends on the level of domestic insurances compared with commercial insurance. Domestic includes car, house and contents insurance. Commercial would include office buildings, PI insurance, business insurance packages, including public liability. Commercial insurance attracts a higher multiple and the location of the business also plays a role.

Multiples paid for accounting businesses have risen once again and the demand is higher than ever. Not only do accounting practices wish to buy or merge with other accounting practices, but financial planners are also buying into these businesses. Business accounting fees, as compared to individual return fees, are in high demand and can command a higher multiple. The selling of country and regional practices can take a lot longer due to the limited number of buyers in those areas and they tend to sell for a lower multiple than city-based practices.

I’ve added an additional sector, ‘Investment clients on platforms with high Management Expense Ratios (MERs). So, what’s a high MER? Tony Blythe, Relationship and Training Manager for boutique licensee HNW Planning, suggests that before you add buy/sell spreads and adviser fees, some platforms can have a MER of up to 2% per annum. These platforms can sell for up to four times their recurring revenue (RR). The purchasing adviser can move the client’s investment to a lower priced platform, and at the same time increase the adviser fee commensurate with the service they are providing. Overall, this can save the client up to 1.5% per annum.

Time to sell?

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There’s really no such thing as an ideal time to sell your accounting or mortgage business, but if you have a financial planning business, now is the time to seriously consider selling. So, why now?

For several years, there’s been a lot of poor media on the planning industry, and with two parliamentary inquiries underway and a third one to start soon, the spotlight on financial planners is only going to heat up.

The educational requirement on planners has always been questioned, and the recommendation from industry associations is that a transition is required. If you don’t want to start a University Degree course or the equivalent, it’s time to retire or change professions. If your business is primarily investment focused with a lot of shares and your adviser service fee is aligned with the accountant balance, be wary of your revenue falling in another share market crash. With the world in political turmoil, October being the worst month for corrections, and after three years of upward share market movement, a downturn is expected. Another reason for planners looking to find a buyer now is finance. Just over 72% of clients signed with Radar Results require finance to buy a business or client register. Shortly after the GFC, you couldn’t get a cent of finance; banks are now nearly giving it away. With rumours swirling of interest rates set to increase and a second GFC on the way, now is the best time to sell.
The change to a fee-for-service model from the commission system will eventually reduce the value of your planning business. Recurring revenue multiples are set to be replaced by profitability valuations. However, the recurring revenue multiples being paid for financial planning businesses and client registers are currently at an all-time high, which can be attributed to the demand by buyers.

Radar Results, Australia’s largest buyer’s agent’s service, has over 200 financial planners and accountants under contract looking to buy businesses. Some have purchase budgets of $5M to $10M, while others want to spend just a few hundred thousand dollars. Cross selling other services, such as tax returns, loans and property sales is also holding up today’s ‘higher than normal’ prices.

The biggest concern I’m seeing is financial planners wanting to sell, but not having the business ready. Many still do not have a ‘press a button’ client list, or are not fully paperless. The old school planner from the life insurance days of the 70’s and 80’s wants to hang on and die with their business. They don’t actually want to die at their desk, they just don’t know how to take that next step.

Where’s the highest demand?

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The financial services sector operates in a number of different areas, and buyers can choose from a number of sectors, such as accounting, SMSF’s, risk insurance, mortgage loans and general insurance.

Next month, Radar Results will produce its ‘6 Monthly Price Guide’ listing multiples that have been paid for these different types of businesses. But leaving multiples aside, which areas have the highest demand? Currently, it’s the high growth areas of Queensland, in particular the Sunshine Coast. Next is Adelaide and Perth, with financial planning and accounting in high demand as evidenced by the prices being paid.

Next is Sydney, specifically the northern suburbs and inner west looking for financial planning books; $150,000 of RR. South Sydney is a key demand area for mortgage books of any size with trails fetching up to two times, and the traditional risk insurance books still fetching 3.5 times if the clients are not too old.

Accounting businesses are required in Sydney’s CBD area, with tax fees commanding $1/$1, or even more.

Particular platforms are also in high demand, like Asgard, Navigator, Oasis, Summit and North. Some of Radar’s clients would pay four times recurring revenue if the age of the clients were to their liking and the location of the clients were geographically suitable.

Since 2011, there’s been 104 practices or books of clients sold through Radar, with a large proportion coming from NSW. While our head office is in NSW, you would expect a more even pattern state by state, particularly as we have had offices in all states since 2011.

State

Number
NSW

42
QLD

27
VIC

13
SA

10
WA

10
ACT

2
TAS

1
NT

0

What’s selling, Who’s buying?

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More financial planning practices and client registers have hit the market now that the Government has clarified grandfathering. In an amendment to the FOFA regulations, the following additional wording now has sellers and buyers very happy, ‘A person who purchases a business has the same rights under this regulation that the seller of the business would have had if the seller had not sold the business.’ Govt Exposure Draft 28 Jan 2014, Item 19.

Sell Buy Merge Experts, Radar Results, received last month 9 new practice listings to sell, virtually ending the drought that started last July.

In addition to an influx of new sellers of financial planning practices, we have seen higher demand than usual for mortgage books, forcing prices up. Recently a seller was offered two times the trail. Irrespective of where your mortgage book is located, Kalgoorlie, Alice Springs, Broken Hill or Townsville, buyers are paying cash 1.5x to 1.8x trail, no questions asked. And it doesn’t matter who is the aggregator.

Accounting practices have continued their climb up the ladder, probably being the second most sought after financial services business (to buy). Sellers in Sydney and Melbourne are the most popular, particularly if they have around $500,000 to $1M in accounting fees.

Corporate superannuation has made a recovery. After multiples had dropped to as low as zero, demand has now picked up, and so have prices. It really depends on who the fund manager is that’s providing the administration service, and which licensee the buyer’s with. Some licensees are paying their advisers, who are qualified corporate superannuation fund specialists, a flat annual fee per member to continue servicing the plan, even though the commission has been switched off. In some cases, the flat fee is higher than the commission that was being paid originally. Hence, multiples have moved up to 1.5x to 2.0x. Depending on the licensee, a buyer of last resort (BOLR) can be offerd up to 3x the revenue.

D-Linked corporate super clients still have some value depending on which institution manages the fund. Some super fund administrators can guarantee the payment of revenue for up to 3 years, or until 2017, at which time commissions must cease.

Queensland is still the busiest state for Radar Results with currently 25 practices looking to sell, followed by NSW with 24, Victoria 10, WA 8, TAS 1, NT 1 and SA 1.

6 monthly valuation guide

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PRICE MULTIPLES REMAIN STABLE

Radar Results, M&A consultants to the financial services industry, has provided its six-monthly price guide on the value of financial planning and accounting practices. Since Radar Results lodged a Submission to Senator the Hon Arthur Sinodinos, Assistant Treasurer, regarding a decision on the issue of the grandfathering legislation and how it is inhibiting practices from moving between licensees, industry sources suggest that practice values have fallen. John Birt, Principal for Radar Results, states “Valuations have remained stable; but the effect is that since July this year many sale transactions have stalled”.

RADAR’S 6 MONTHLY PRICE GUIDE

An indication of prices as at November 2013:

Revenue Type

Multiple of Recurring Revenue
Investment clients 65yrs+

2.3x to 2.7x
Investment clients age 35-64yrs

2.7x to 3.0x
Risk clients (average age under 50 years)

3.0x to 3.8x
Corporate super clients (down from 0.8x to1.3x)

0.5x to 1.0x
Cs and Ds (investment and risk)

1.5x to 2.5x
General insurance

1.5. to 2.0x
Mortgage clients (up from 1.2x to 1.7x)

1.5x to 1.9x

Accounting fees (lower end fees up from 0.65x, top end down from 1.4x)

0.80x to 1.2x

The multiples above can vary depending on the terms offered by the vendor; actual location of the clients; client ages; and the particular investment products recommended. In relation to multiples paid for risk books, or insurance-revenue based practices, the client’s occupation, premium size, policy type and insurance companies used, are all critical. The multiples displayed above are for high-quality risk clients.

The table above is based on market activity for the last 6 months to 31 October 2013. The multiples above can vary depending on terms offered by the vendor, actual location of the clients, client ages and the recommended investment products.

Change in the price range since April 2013 has been evident in three sectors. The number of corporate super clients selling multiples has again fallen, due to the Government’s MySuper product being likely to ‘take over’ in the next few years; the number of mortgage clients has increased due to the demand for this style of client and trail revenue, with cross-selling opportunities being the main driver; and accounting fees have risen on the back of buyers’ demand. Once again, cross-selling opportunities with accounting clients, along with the ability to offer a ‘one stop shop’, are the drivers here. When a practice which is selling has a total revenue of at least $1M, an EBIT multiple may be applied to its valuation rather than a multiple of recurring revenue. Interestingly, concerns around FOFA have not lowered valuation multiples; if anything, in some states such as WA, VIC and NSW, they have increased. EBIT multiples have remained steady since FOFA was introduced and can vary from 4 times to 6.5 times, depending on the practice. More commonly, an EBIT range is between 4.5 times and 6 times.

CHOPPING UP A BOOK

What’s called ‘chopping up a book’ can often give the seller more money. Radar Results has many clients around Australia who would love to acquire part of a business. Chopping up books has become popular with sellers who find their business is too large to sell easily. Instead of waiting months, or even years, to find a buyer who wants a large business, sections of the book, like the mortgage loan trails, can be on-sold easily and quickly; allowing risk clients, investments clients and even accounting clients to be separately offered to different buyers. Generally the purchaser is likely to pay the seller a higher price for the individual sections because their appetite has been satisfied.

FOFA Causes Havoc

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RADAR RESULTS – SPONSOR FOR 2013 SYDNEY FPA CONFERENCE

Radar Results, M&A consultants to the financial planning industry, recommend you visit their stand at this year’s annual FPA Conference to be held in Sydney. From 17 October to 18 October you can have access to Radar’s expert consultants in the area of practice valuations, advice on buying a financial planning business or if you wish to sell, what to do. Not only can the Radar consultants provide advice on financial planning businesses, but also on accounting practices, mortgage businesses, SMSF client registers and risk books.

FOFA CAUSING HAVOC

FOFA was introduced to give more Australians better advice at a lower cost. Some aspects of FOFA are doing the opposite; stopping planners from moving some clients from a commission system to a fee arrangement, basically to save the planner from more ‘paperwork’ and responsibility.

An annual Fee Disclosure Statement (FDS) now needs to be sent out to all clients who pay the planner a fee. The FDS must state what services were provided over the past year and at what fee level, plus what services will be provided next year and at what fee level.

A long serving planner recently suggested that a fee of $1,700 ‘sounds about Older man stressedright’ as a fee for an annual review. When quizzed on how he arrived at that amount, he said “Well, they have about $300,000 in FUM; what do you think John”.  I replied “I think it should be based on what value you have delivered, and plan to deliver in the next 12 months.”  I asked what the planner did for the client now “nothing, unless they call me and ask for a review” answered the planner. This is not an uncommon occurrence.

It would be good if planners could measure what it costs to look after that client for the year, and then going forward, determine a fee based on costs. I know it sounds difficult and complex, but for most of the 90’s that’s exactly what went on with accounting firms I worked with.

LAWYERS CRITICAL TO A SMOOTH DEAL

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Radar Results, M&A consultants to the financial planning industry, recommend the use of specialist lawyers who have experience with financial planning transactions. Principal for Radar Results, John Birt, stated that he had seen many Lawyer symbolsales either stumble or drag out or just fail because lawyers involved in the deal were not experienced. Birt said, “We have developed a panel of lawyers on our website; they’re specialists who are very experienced.” He continued “It’s got to the stage that if a financial planner approached Radar Results to sell their business, and if they didn’t want to use a ‘panel lawyer,’ you’d have to think that there would be problems.” To review a panel lawyer in your city, simply go to our website to order your own DIY Sellers Kit.

SYDNEY AND PERTH DROUGHT

Associates for Radar Results have reported that the number of financial planning practices for sale in Sydney and Perth has dried up. Compared to some other states, particularly Queensland, the number of practices for sale is the lowest it has been since 2007. Unfortunately for buyers in these particular cities, the supply and demand curve may force up prices.

ORPHAN CLIENT VALUES TO FALL

There are many definitions of an orphan client, a D grade client and a C grade client.

Measures have been taken to recover lost superannuation accounts and from July 1st money down drain2013, accounts of those members with up to $2,000 who have been unable to be contacted will be transferred to the ATO, with interest to be paid at a rate equivalent to Consumer Price Index inflation. This limit of $2,000 is expected to rise to $3,000 in 2014 and may eventually be limitless. These measures may reduce the sale value of ‘lost members’, which is already at an all-time low.

Historically Radar Results has always received requests wanting to buy as many clients as possible, the smaller the revenue-per-client the better. This trend may well be ending, especially with FOFA and fee-for-service set to dominate in the future.

Valuation guide for your practice

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Radar Results has produced its 6 monthly Valuation Guide for those practices and client registers sold since May 2012. The most notable change has been the surge in demand for accounting practices, notably those that do not already offer financial planning services. The opportunity for financial planners to acquire an accounting practice and then market their services to the tax clients is considered extremely desirable. Their services may include loans, estate planning, general insurance and financial advice. This higher demand has, in some circumstances, forced the ‘usual’ multiple above $1.00 for each $1.00 of tax fees. The demand for tax-fee client bases is mainly in the capital cities, whereas demand is less in the country and regional areas.

An indication of prices as at Nov 2012

Revenue Type

Multiple of Recurring Revenue
Investment clients 65yrs+

2.3x to 2.7x
Accumulator investment clients

2.7x to 3x
Risk clients (average age under 50 years)

3x to 3.8x
Corporate super clients

1.0x to 1.5x
Cs and Ds (inv and risk)

1.5x to 2.3x
General insurance

1.5. to 2.0x
Mortgage clients

1.5x to 2.0x
Accounting fees

0.65x to 1.4x
Demand for risk businesses
Demand for risk businesses is as high as ever, particularly since FOFA has basically left this sector alone. Prices paid for good-quality risk businesses in Australia haven’t really changed in three years. They rose substantially during the end of the GFC in 2008 and have clearly held their position as the most sought-after financial-services business. Before you formulate your selling price, aspects such as the client’s age, type of policy, renewal-commission percentage and servicing levels need to be taken into account. A higher multiple is paid for quality clients who have a professional occupation and who pay high premiums due to the higher sums insured.
Demand high for ‘larger’ financial planning practices

Inquiries to Radar Results this year for the acquisition of larger financial-planning practices have increased. When asked ‘what’s considered as larger’, the reply would be ‘at least $2M of recurring revenue’. Boutique planning practices have grown substantially since the GFC through their continued acquisitions; and they are now after ‘larger’ acquisitions.
Recurring revenue (RR) definition confusing Any financial planner who’s looking to sell their client register or business should first agree with the purchaser on what the actual recurring revenue (RR) they are selling is. Whilst there’s no hard-and-fast rule, Radar Results has, for many years now, advised that volume bonuses and commission on regular contributions to superannuation policies should not be included in the definition of recurring revenue.

We even find that sometimes the seller has included GST in their RR figure and, in some instances, neglected to add back the licensee’s service fee. This may change the RR figure by up to 20%. If you are thinking of selling your financial planning business, you may benefit from asking a Radar Results’ consultant for advice before you go to market.

Practices that have been sold in the past on a payment-instalment method, and where the second or third payments are yet to be received, may be affected by the ban on volume bonus. If the revenue previously included a volume payment, then the future instalment payments by the purchaser to the seller may be lower than would have been expected.

Should you merge?

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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.