Do you know what your business is worth?
The June 2024 Price Guide is similar to June 2023, but the multiple for the Investment and super clients (age 80 years+) have increased by 10% to 0.9 times to 1.1 times the annual recurring revenue (previously 0.8x to 1.0x).
Radar Results transactions for the last 12 months show evidence that financial advisers with clients in the oldest age category have received higher prices over the previous 12 months. This may be due to the supply and demand curve, with fewer practices selling or coming to market. The Covid pandemic and changes in regulations (2020-2022) saw a substantial exodus of financial advisers from the industry. Many advisers chose to sell their client lists and associated revenues or their entire practices. This trend wasn’t limited to financial planning but was also evident in accounting and mortgage broking businesses.
However, as the pandemic subsided, the business environment began to stabilise. Transaction activities have since returned to more typical patterns, though the legacy of the pandemic’s impact on supply remains.
Radar Results’ Price Guide has two components: one based on age and one based on the size of the fee paid annually for the ongoing reviews and advice. Buyers and sellers should blend both charts when using the Price Guide to value a business or client register to determine a more accurate calculation.
The fee multiple for the self-managed superannuation fund (SMSF) section has also changed, moving to 1.25 times to 1.75 times the annual administration fee to manage the SMSF. This may include the tax return of the fund and its members. The audit fee is usually charged separately, costing around $400. SMSF administration fees vary immensely, ranging from $1,500 to $6,000 annually, depending on the investment mix.
Buyers Focus on Fee Size
Radar Results has revised its Price Guide for financial planning businesses and client books, reflecting the industry’s evolving dynamics. The new changes highlight the growing importance of fee size in business valuations, providing a clearer picture for buyers and sellers.
Key Changes:
Fee Size Takes Center Stage: Over the past year, fee size has become a pivotal factor in determining business value. This shift underscores the need for financial planning businesses to maintain competitive fee structures to attract potential buyers.
Revenue Multiples as a Benchmark: Sales transactions in the industry now predominantly involve multiples of recurring revenue. This recurring revenue comprises risk renewal commissions, ongoing fees for service, or a mix of both. These metrics serve as a reliable benchmark for assessing business value.
Influencing Factors for Multiples: Traditional factors that influence the multiples buyers are willing to pay include:
- Vendor terms
- Client locations
- Client ages
- Investment strategies
- Products offered
Emerging Trends:
The latest update reveals a notable trend: fee size now significantly impacts the multiples buyers pay. Buyers are increasingly focusing on two main factors—client age and fee size. This dual approach allows for a more precise valuation using Radar Results’ Price Guide tables.
Practical Example:
Consider a scenario involving a 70-year-old retiree client who pays $6,000 annually in ongoing fees and is based in a Capital City. Here’s how the valuation plays out:
- Age-Based Table: The multiple typically ranges from 1.9 to 2.5 times. Being in a Capital City generally results in the higher 2.5 times multiple.
- Fee Size Table: The multiple extends from 2.6 to 3.3 times. Most sellers would anticipate a minimum multiple of 3 times or more.
This example illustrates how buyers can use the Radar Results Price Guide to calculate a blended result for each client, combining age and fee size factors for a comprehensive valuation.
Market Shift Explained:
The reasoning behind this market shift is straightforward. Over the past five years, the costs for financial planners have risen significantly, leading to higher cost-to-serve ratios. As a result, acquiring a client book with fees below the cost to serve is less attractive to buyers. Raising fees early in a new client relationship is challenging, making initial fee size a critical consideration.
In conclusion, Radar Results’ updated Price Guide provides essential insights for financial planning businesses navigating the current market landscape. By understanding these changes, buyers and sellers can make more informed decisions, ultimately driving better outcomes in business transactions.
Bob Blurton – QLD Associate – 0488 403 139 – bob@radarresults.com.au
Risk insurance clients worth more
The demand has exceeded supply, with many buyers asking Radar Results about risk insurance client registers and businesses. Australia’s largest buyer agent for financial services, Radar Results, is looking for any financial planner or life insurance agent looking to sell; and looking at doing so right now.
The price multiple on risk insurance clients is traditionally 2.2 times annualised renewable commission and as high as 2.7 times depending on the average client age of each client. The age range that is most favoured is between 35-55 years old, and the size of the business’s annual recurring revenue is $500K-$750K. The younger the risk clients, the higher the multiple paid by our clients (the buyers).
This represents a purchase price between $1.35 million to $1.5 million based on the current price multiples of three times and on the annual recurring revenue of $500,000.
Some of Radar Results’ buyers are now asking for much higher levels of annual fees, as much as $3M per year. These risk books are harder to get but not impossible, as smaller companies are merging with larger ones. Price multiples on risk-insurance books are expected to increase from here, insulated from stock market falls.
Accounting practices for sale are becoming rare
Radar Results sees price multiples rising for accounting practices in the next several years. It is simply a matter of supply and demand, with fewer sellers on the market. The traditional size business sought-after by accounting firms has fees of $1-$2 million per year.
Recently, clients at Radar Results have been asking for larger accounting practices, as big as $5M. Based on the standardised Earnings Before Interest and Taxes (EBIT), a sales price of that size of accounting practice will range from $8M to $10M, using an EBIT of $2M. These size accounting practices are typically located in major cities and a few larger regional areas.
Accounting fees can include self-managed superannuation fund (SMSF) admin fees. These annual administration fees may be between $3,000 to $4,000 per SMSF account, including the auditing and tax returns. The selling price for these administration fees would be more than double the standard accounting fees. I can see that buying SMSF administration fees will cost more because the revenue is stable and they are very hard to find.
July 2022
Buying financial planning businesses or accounting practices in regional areas is becoming a significant issue with many of our buyers. We have about 200 active buyers in Australia, many wanting sellers in the capital cities. They used to look at regional areas for acquisitions, but since the pandemic, it’s almost impossible to employ staff to replace the business owner.
Sellers in the country and regional areas generally want to collect the sale proceeds over a year, then move into retirement or some other career.
Qualified accountants and financial planners are impossible to find outside capital cities. Radar Results buyers are no longer prepared to risk not having support staff to run these businesses once the owner moves on.
Below in this newsletter are several positions our buyers want to fill, and with the lack of demand for regional practices, prices have fallen.
Radar Results has published a Price Guide for 15 years, and from July 2022, we will publish two Price Guides. One based on the age of the financial planning clients that are sold, and a new version based on the size of the client’s fee paid for the review service.
In capital cities and regional areas, the demand has lifted for clients who pay higher fees. The minimum fee payable to a financial planner is expected to be $4,000 to $6,000 per year. Similarly, accounting clients that pay higher fees are more valuable and sought after if they are small to medium-sized businesses.
The challenge is to find qualified accountants in these regional and country areas to take over from the owner.
