Financial advice practice valuations could head higher as the federal government’s advice industry reform package neared passage through Parliament, clearing some of the uncertainty weighing on the industry, practice brokers said yesterday.
The Future of Financial Advice (FOFA) draft laws passed the House of Representatives last week, and brokers said valuations had held up well even at the height of the uncertainty around the reforms.
“We’re not seeing any great change, whatsoever,” Kenyon Partners managing director Alan Kenyon said.
“There’s lots of rhetoric around what the market are or may or will do ahead of FOFA and other things, but our judgment is based on when we take a business to market and call for indicative offers – what are the prices people are submitting.”
Radar Results said an informal poll of 100 advisers showed 43 per cent of respondents, mainly buyers, would pay two to 2.5 times recurring revenue (RR), and 34 per cent, mainly sellers, wanted 2.5 to three times.
However, Kenyon said buyers were paying two to 2.5 times RR for a book of C and D clients, but businesses commanded more.
“Businesses are still very much at the three, 3.25, 3.3 [times RR] mark and certainly around the 5.5 to 6.25 times [earnings before interest and tax],” he said.
He said businesses tended to attract an RR multiple if they were smaller and the buyer planned to fold the newly-acquired practice into their own business. They attracted an EBIT multiple if the buyer was likely to keep offices and support staff and most of the infrastructure of a given practice.
“Prices and terms haven’t varied much at all over the last two years, but now there’s some evidence in the marketplace that a gap is forming between buyer expectations and seller expectations,” Centurion Market Makers managing director Chris Wrightson said.
Wrightson said the gap was due in part to FOFA, which cast uncertainty over what revenue streams might be worth.
“While FOFA is still not clear on what will be grandfathered, as it becomes more and more likely that FOFA will pass and get implemented, I think we’ll see an increase in transaction volume,” he said.
Kenyon said potential buyers had been analysing revenue streams, making for softer multiples for certain types of RR.
“Once upon a time, you could say ‘it’s recurring revenue of $500,000 and 3.3 times that is what the price is’,” he said.
“Now, people are looking at that $500,000 and saying: ‘There’s $100,000 of risk renewals so that attracts a higher multiple, there’s $100,000 of revenue from older clients in allocated pensions, so that’s a lower multiple.’ So, on average, you could be coming up with a slightly lower multiple.”
However, he said demand still outstripped supply.
“If you look at what the big institutions are doing, they’re desperate to continue to acquire distribution, so distribution is king.”
