It’s been an interesting period since Xmas with the value of financial planning (FP) firms still trending down. Any further downturn in the markets could see their values fall further. With more and more planners looking at retiring, there may be an oversupply of planning firms for sale in the next few years.

The recession has seen finance approvals for FP acquisitions difficult to secure. Although, the situation has improved recently with lower interest rates on these particular loans.

Unemployment in Australia has been increasing by half a percent (0.5%) per month and may reach 10%. Just today, the government acknowledged that double digit unemployment is likely. This is a concern for all – especially the FP industry with increased redundancies and lack of income from new business. With investor confidence at an all time low, I wonder when advisers will move back into the market? The Dow Jones is up 23% from 9 March 2009, which was only 6 weeks ago! 

With demand for financial planning firms at an all time high, Radar Results has opened another Melbourne Office. Queensland is also very busy for us with many advisers looking to expand their current FP businesses – so a Brisbane office is likely for June 2009. Also in this Newsletter we discuss recent recurring revenue multiples, how they’ve changed and how they can be applied to value your business. We compare RR multiples between regional vs city practices, platform vs retail business plus risk business vs investment business. Please call me if you have any questions or go to Radar Results Website. Obviously every business is different, so if you would like Radar Results to value your business (fee free) just fill out our online Valuation Questionnaire. Takes only 4 minutes. Please read on ….

RECURRING REVENUE MULTIPLES

Financial planning businesses in Australia have frequently been valued on a multiple of recurring revenue (RR), particularly when they’re offered for sale. It’s important that the buyer and seller both agree on the exact definition of RR otherwise the expected purchase price can be quite different. So agreement early needs to be reached on definition of RR to avoid conflict.

Historical sale’s figures of FP businesses when compared to present day market values can be very misleading. As well, the RR multiple used for valuing a capital city client base when compared with a country/regional client base can be “miles apart”. To further complicate matters, the different RR multiples used for platform FUM revenue compared to non-platform FUM revenue can be 50% higher. The value of revenue from risk clients can also be valued differently between city and regional locations. Risk RR today can sell at a higher value than investment revenue due to demand and it’s lower volatility. In many situations, RR has increased over the past year for risk business whereas FUM revenues have declined and been volatile.

Businesses that are large enough to provide comprehensive financials can also be valued on Earnings Before Interest and Tax (EBIT) although definition of “large” can vary between a $1M business and a $10M one. Depending on the quality of the business, an EBIT of between 4 and 7 can apply.

In summary, you could apply the following multiples of recurring revenue (RR) to a business:

Regional Platform FUM RR               2.7x       
Regional Non Platform RR                2.0x
Regional Risk RR                              3.0x
CBD Platform FUM RR                       3.3x
CBD Non Platform FUM RR               2.7x
CBD Risk RR                                     3.5x –  4.0 *
 
 * Depending on age of clients, types of policies, insurance companies etc.

If you apply the above RR multiples to the different parts of a business based on location, platform and risk revenue – a fair valuation can be determined. C and D grade clients are in large demand and can usually fetch between 1.5x – 2.5x RR. The variation in RR depends on the seller’s ability to provide any client files (hard or soft), what is actually contained in these files, client service records, the seller’s compliance reports, payment terms, number of clients, age of clients and their location.

NEW OFFICE IN MELBOURNE’S EAST 

Introducing our New Associate – Merv Wilson

Merv has been working for over 36 years in Banking and Financial Planning and now looks after of 2nd Melbourne Office.  He spent the first 15 years in retail banking with National Australia Bank, including 9 years as a branch manager before assisting with the establishment of the bank’s financial planning arm in 1987. 

In 1994 Merv crossed to Pembroke Financial Planners, which subsequently became Godfrey Pembroke in 1995 before joining Capstone Financial Planning in 2005. Merv joined Radar Results in 2008, having scaled back his involvement with Capstone.

Merv is a CFP, holds a Diploma of Financial Planning and a Bachelor of Science degree from Melbourne University.  He is a strong advocate of the “Fee for Service” approach to Financial Planning, as pioneered by Pembroke in the 1980’s.
 

Merv has seen both sides of buying and selling Financial Planning Businesses, having purchased the business of another Godfrey Pembroke Consultant in 2002 and is now well advanced in the succession of his Capstone business.  He believes that the single most important ingredient in a successful transition is to identify like minded sellers with buyers. Contact Merv if you would like to sell your financial planning business. Radar Results has a policy of not charging the seller.
Merv can be contacted on 0402 852 070 or merv@radarresults.com.au

 

 

 

 

The investment market downturn for the past year has seen the value of financial planning firms reduce by up to 30%. Last year Radar Results provided 180 valuations for the financial planning industry and the impact of reduced recurring revenues and lower profitability on some firms has been dramatic. Practices with either a high level of risk product renewals or fixed dollar review contracts have weathered the downturn a lot better than pure FUM practices. Those with review fees aligned to FUM are down between 16% and 31%, even after allowing for the introduction of new business. Practices affected the most are those with “geared” clients or who have invested in products and companies that have gone “belly up”. Besides the FUM reducing, the multiples for practices has also fallen. Multiples of recurring revenue are down between 0.25-0.50x and EBIT multiples have fallen a full 1.00x.

The impact has seen some financial planners, para- planners and client admin personnel recently made redundant. New investment business seems to have reduced to a trickle and sellers approaching Radar Results for a valuation has doubled from last year.

Dilemma for sellers

The market downturn presents a huge dilemma for advisers thinking of selling their practice. With valuations now lower, some advisers feel that the market may increase during the coming year suggesting they should hold on and benefit from the possible rise. What if it doesn’t pick up and the market drops a further 20% which many experts are suggesting? What if it plateaus for 5 years? Greenspan’s comment “1 in a century event”, Foxtel commentators saying “even professional investors are fleeing” and business commentators are suggesting 5 years before recovering, doesn’t inspire confidence. With bank cash rates at 8%, a seller could take their equity today and get a guaranteed 16% increase over the next 2 years rather than further erosion of their business. Investors are asking their advisers the very same question today. It’s a real dilemma and forcing those advisers to stay working even though they’ve had enough and are suffering from health problems and stress. The average age of advisers is still increasing therefore more practices are coming onto the market. If you wish to consider selling your financial planning business just click on the link Valuation Questionnaire. Radar Results provide a confidential consulting service to our buying clients.

FPA Sponsors

Radar Results will be attending this year’s FPA National Conference from 20 November as sponsors and will have an information booth in the Trade Expo section. Associates from our Newcastle, Melbourne and Sydney offices will be attending along with principals from our Head Office. Phone me if you would like to meet me at the FPA Conference. Ph 02 4384 5670.

AIOFP Sponsors

 Radar Results are sponsors at this year’s Association of Independently Owned Financial Planners (AIOFP) Conference to be held on the Gold Coast in 2 weeks from now 1st to 3rd October. Matt Taylor from our Melbourne Office and I will be attending the Conference and will be available to meet any Queensland advisers whilst we are there. You may like to discuss the value of your business or consider buying another FP business whilst prices are low.  Email me if you would like to meet for a private discussion about your FP business. john@radarresults.com.au
 

Thirteen years ago I doubled the value of my recurring income in a matter of weeks. After attending a Boot Camp on Financial Planning I was convinced that if I doubled my trails and provided a service to my FP clients equal to the increased trail, I would have a better business. I increased the trails from 0.375% to 0.750% and wrote out to all the clients explaining why. Naturally, I had a few phone calls but only lost one client. Actually it was a client who always complained about fees anyway, so I was quite relieved to see him go. My annual FP trail income moved from $100,000 to $200,000 overnight which allowed me to provide a lavish and pampering client service program. More referrals followed and today that business has $300M of FUM. The FUM in 1994 was zero. If you’d like to read further, I have one other tip on making life easier as a planner.

Getting rid of your C’s and D’s

The same Boot Camp Conference suggested life would be a lot easier if I didn’t have to deal with the C and D grade clients. I might add here that my definition of C’s and D’s can be quite different to the industry’s definition. The speaker said to hire a bus, load them all on and drive them down the street to the nearest planner and give them away. I understand what they were saying but it seemed a bit graphic. These days you can sell the Cs and Ds, and sometimes, for quite good money. When I sold mine in 1995 it was such a relief. I could now concentrate on those As, the one’s who pay me the most, appreciated the service the most and referred like minded people. Allowing for execptions D’s refer D’s and A’s refer A’s.  So how do you do it – get rid of your C’s and D’s? It’s all about finding the right buyer and that’s how we can help.

Finding the Right Buyer

Firstly, by having your C’s and D’s professionally valued, you’ll then know what price to expect. At least a ball park figure without spending any money – just a few minutes of your time. Radar Results uses many criteria when valuing C’s and D’s, all explained on our website under the Selling a Financial Planning Business tab.

It’s a free service and takes about 4 minutes to complete the online Valuation Questionnaire. We also supply the right buyer and there’s no fee to sell using our service. Any other questions just give me a call on 02 4384 5670.