Financial Planning Practice Valuations Impacted by Life Insurance Commission Reforms and FOFA

SYDNEY, Australia – January 27, 2016 – The recent Life Insurance Commission reforms, in addition to the ongoing impact of FOFA, have impacted financial planning and wealth management practice valuations over the last 5 years.  However, calendar year 2015 also saw increased transaction activity for the buying and selling of financial planning businesses, compared with calendar 2014, which resulted in some small increases at the upper end of the Multiple Range for some assets.

According to a report released today by wealth management industry experts Centurion Market Makers, in 2015 many small practices and client books were sold for between two and three times annual recurring revenue. While similarities with 2014 there were however exceptions - most notably purchases made by large institutions under BOLR arrangements (or similar), sales of exited clients from corporate super plans resulting in accrued default account clients (ADA’s), and small risk client bases.

Another change in 2015 was buyer attitude. The lack of buyer interest in ADA’s resulted in negligible value placed on these client books. Additionally, buyers have become increasingly focused on the age-profile of prospective client bases.

“Buyers now take greater interest in the age-profile of the client base and how the revenue profile of the practice matches the age-profile,” said Chris Wrightson, founder and CEO, Centurion Market Makers. “This practice by buyers is driven by their interest to upsell or cross-sell other services and to identify additional revenue opportunities within a client base. There is no science to the way buyers are using this information to assess value, however it is impacting the buyers view of valuation.”

In its fifth year, the 2016 report examines the sale price and valuations of financial planning businesses across Australia over the previous 12 months. Centurion analyses trade sales data from industry sources as well as conducts extensive interviews with practice owners to determine a considered position of the market. The below illustrates the range where the majority[1] of transactions occurred:

Business, Client or revenue type                                                   Multiple Range

C and D clients – no ADA clients                                   1.8 to 2.6 RR

Exited Corporate Super members (ADA’s)                    0 to 1.0 RR

Small FP Practice with mix of revenue                          2.4 to 3.2 RR

Risk and super only business / client book[2]                2.6 to 3.2 RR

Fee for service – no retail admin platform                     1.7 to 2.4 RR

Corporate Super[3]                                                         0.8 to 1.8 RR

Large FP Practice                                                          5 to 7 EBITDA

Partial Equity Positions

Minority Equity position in large practice                          4 to 6 EBITDA

Majority Equity position in a large practice                       5 to 7 EBITDA

Practice Valuation Decline in 2016 and Beyond

The question many buyers are asking is ‘are there further falls in practice valuations likely over the next three to five years?’

“The market outlook says yes, and we predict by 10 to 15 percent over the next five years,’ said Wrightson. “This is particularly relevant for smaller or single-person operations where there is increased seller activity, as well as large practices where there are simply fewer buyers.”    

According to Wrightson he is seeing increased seller activity for smaller and single-person operations as a result of the new education standards coming into effect and practitioners choosing to exit the industry.

But it is not all bad news. In general, financial planning businesses tend to sell for more than equivalent-sized businesses in most other industries or professions when measured by revenue or profit multiples.

“Based on the data in the 2016 report, even with lower valuations, it’s likely financial planning businesses will continue to trade at a premium to many other small businesses and professional service firms,’ said Wrightson. “That said, if the generous bank funding terms currently available of 10-years principal and interest were to be replaced with shorter repayment period terms, this would likely impact buyer capacity and current valuations.”

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