COVID-19, royal commission take toll on practice values
Advice practice values have continued to soften in the wake of royal commission-driven regulatory reform and the effect of the COVID-19 crisis on asset-based fee models, according to a financial services business broker.
Radar Results’ latest price guide report revealed that the removal of grandfathered commissions over the course of 2020 had had the most profound impact on advice business values, but softening prices were not being helped by some practices’ exposure to the sharemarket.
“The main impact to the value of financial planning practices is from the royal commission report released in February 2019 and the additional red tape that followed the recommendations,” the report said.
“The banning of grandfathered trail commissions from January 2021 has had an immediate impact, with as much as 25 per cent of the recurring revenue from some practices disappearing.
“The sharemarket crash of February to April 2020 has seen values diminish where fees are connected to funds under management — some practice revenues are down between 5 per cent and 20 per cent depending on the client’s exposure level to shares.”
As a result of these conditions, the firm said the current market for financial advice businesses was “a buyer’s market”, with a large number of practice principals wanting to sell up and retire.
“Radar Results consultants around Australia have reported that price multiples being paid for financial planning practices have softened due to the attitude of buyers in the current environment,” the report said.
“It’s a buyers market and has been that way now for about 18 months. There have been thousands of planners either sacked, told to move to another licensee or given a Buyer of Last Resort (BOLR).
“With the average age of planners estimated to be 60 years or over and started their careers and businesses 25 to 35 years ago, many have had enough and wish to either retire or have a sea-change.”
The firm’s analysis of market activity for the eight months to May 2020 showed that advice businesses were less in demand on the market than mortgage broking, accounting and SMSF administration practices.
Those with younger aged investment and super clients were selling for higher multiples of between 2.2 and 2.7 times recurring revenue, although prices had come down from between 2.3 and 2.8 times recurring revenue previously.
Practices with an investment and super client base of between 65 and 79 years old were selling for between 1.7 and 2.2 times recurring revenue, down from 1.8 to 2.3 times recurring revenue previously. Risk client books aged under 55 had also lowered their sale price to between 2.2 and 2.7 times recurring revenue, compared to 2.3 to 2.8 times recurring revenue previously.
This compared to an increase in sale prices for mortgage client books, which were now selling at up to 2.5 times recurring revenue, compared to a previous maximum price of 2.2 times recurring revenue.
SMSF administration businesses were selling for $1.50 per $1 of revenue, while business accounting practices were selling for between 0.75 and 1.2 times recurring revenue, an average value that had remained steady over time.
