Why the value of your practice could take a hit
How much is your client base affecting the valuation you can get for your business? One M&A consultant reveals the types of clients savvy buyers are willing to pay top dollar for in the current market.
Addressing a recent WealthO2 webinar, Forte Asset Solutions’ Steve Prendeville said advice practices with an older client base, and no active strategy to retain the next generation, were being significantly marked down by business buyers when it came to price.
“Client demographics is an important area — Business Health at the start of this year nominated that 80 per cent of children will terminate their parents’ advisers on the transition of FUM,” Mr Prendeville said.
“This can be offset with the provision of aged care and intergenerational advice such as estate planning. So while I would apply a [valuation] discount for clients over 80, I will reduce that factor if there’s provision of these services.”
Mr Prendeville said the economic impact of the COVID crisis was also playing a role in valuation assessments, with practices whose clients had been significantly affected — such as small-business owners — likely to also be marked down on price.
“With the impact of COVID now we’re making disclosures [to buyers] around how many clients had SMEs and how many accessed super early, which gives you a good understanding of any potential risk to profitability,” he said.
Mr Prendeville said, by and large, practice owners were still commanding good prices for their businesses, given the collapse in supply driven by a mistaken belief that the adviser exodus would cause valuations to plummet.
“In the last three years, [supply] is the lowest I have seen in 18 years of selling financial services businesses,” he said.
“A large part was the mistaken belief there’s been a collapse in valuations. Valuations did move a bit when AMP moved their BOLR from four to 2.5 times [recurring revenue], that shifted the market average from three to 2.5.
“The real issue is we’ve had so much to occupy business owners with responding to COVID, staff working from home and all these issues, so there’s been no headspace to think about sales and there’s been a deferral of retirement dates in most cases.”
Mr Prendeville said while he expected more businesses to come on the market towards the end of the year as the FASEA exam deadline approached, supply would still be low from a historical perspective.
“The normal market level is the previous 15 years of experience, and we are still some way from that market,” he said.
Tony Zhang
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.
