Demand for planning businesses defies market gravity

Current adverse market conditions are having little impact on demand for financial planning businesses, according to 2007-08 sales statistics from Kenyon Prendeville.

With a shortage of planning businesses for sale, the Melbourne-based financial planning consultant reported demand continuing to increase, particularly in the early part of this calendar year.

Kenyon Prendeville facilitated 28 transactions throughout Australia’s capital cities and regions last financial year, compared to a total of 80 transactions over the past five years.

As further evidence of demand, according to director Stephen Prendeville, the broker also has 22 businesses “under discussion” in the market this financial year.

Prendeville attributed the demand partly to the number of planning businesses being put up for sale remaining constant, with a “scarcity factor” of good businesses.

“Many proprietors are deciding to defer sales, given falls to their recurring revenue of up to 15 per cent, which significantly impacts price.”

He also attributed the demand to firms that have been experiencing funds under management (FUM) declines in the investment market “seeking to include inorganic strategies in the absence of any organic growth”.

“Upfront business has substantially fallen and expenses have remained constant and, therefore, profit is threatened, and one answer has been for firms to acquire FUM and increase free cash flow after the servicing of debt.”

However, Prendeville acknowledged some impact on demand by the current market decline, with the “retraction of some listing aspirants that were highly motivated buyers in the 2007 calendar year”.

Higher interest rates have also been nominated by some potential buyers as a consideration, although these were “mainly viewing businesses with operating profits of less than 20 per cent to gross revenue”.

“Overall, however, while a small sector of buyers may have been impacted by economic concerns, these have been replaced by those seeking growth opportunities — and in general, we see no negative shift in demand.”

Market prices for planning practices have also been maintained against an environment of increased demand and minimal supply, Prendeville added.

The consultant’s average business sale price increased during the year to $2.62 million — albeit boosted by five transactions over $3 million — compared to a previous average sale price of $1.5 million.

The average multiple of recurring revenue on which businesses were sold during 2007-08 was 3.37, slightly down overall from 3.45 in 2007, but right on the annual average for the past five years.