Lending certainty to stabilise practice values
Valuations of financial planning practices are set to stay steady over the next 12 to 24 months provided the banks maintain their current lending practices, a business broker says.
After five years of falling values, Centurion Market Makers founder and chief executive, Chris Wrightson, believes valuations of financial planning businesses have stabilised.
Centurion's annual Selling a Financial Planning Business report, released today, revealed that there was an upswing in activity in the market, with businesses changing hands for similar figures as seen in 2013.
"We saw a reasonable decline over quite a period, but what we've seen in 2014, the sales that we're aware of¬ seemed to be very similar to 2013," Wrightson said.
"The key components of the marketplace are there - there are more buyers than sellers; the banks are lending well against the assets [so] for a bunch of reasons we don't see any further decline in the next year or two.
"If you leave the current status quo for regulation, lending policy ad supply and demand, that's where we're at."
Data from the report found that many small practices and client books were sold for between two and 2.8 times their annual recurring revenue, which Centurion reported was "in line with 2013".
Although financial planning businesses' valuations fell by approximately 20 per cent since 2009, the report found they continued to sell for more than equivalent-sized businesses in other sectors, due to a number of key differences they exhibit.
"Financial planning practices typically attract recurring monthly revenue with little seasonality; minimal aged receivables; low bad debts, working capital, plant and equipment costs; as well as zero inventory or stock," said Wrightson.
While Centurion forecast that practice values will remain stable in the year ahead, Wrightson said the increased activity noted in 2014 would flow through 2015.
"There is an increase in transaction activity and you'll see more of it later this year, because the increase in enquiries through the back end of last year was definitely there," he said.
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