Low practice valuations the new normal
Financial planning practice valuations have fallen by 20 to 25 per cent due to a shakeout in the quality of practices coming to market and are unlikely to return to previous levels.
Speaking at the Financial Planning Association Professionals Congress in Sydney, Seaview Consulting director Bob Neill said the downward trend in practice valuation was unlikely to revisit the heights of the past and planners were unable to shape that downward trend.
However planners were able to control where they sat in the new price range environment, said Neill, who was speaking at the Financial Planning Association congress in Sydney.
Neil said the focus on practice valuations was now on the capitalisation of historical earnings, particularly where parts of business where being bought or sold.
"We have been asked to pull apart revenue stream for clients and look at the components and sources of the revenue that is being priced in the practice," Neill said.
According to Neill, quality businesses are being sold at five to five-and-a-half times earnings before income tax (EBIT) or two to two-and-a-half times revenues. However what prices were actually being paid was dependent on whether the interested party was a buyer or seller.
Neill said that while planners might be concerned about lower practice valuations, the figures were better than those seen in accountancy circles where practices usually sold for three-and-a-half to four times EBIT.
"Prices in that space have polarised and practices that are dependent on compliance-based business have seen falling values since room for growth is limited," Neill said.
"Despite this there still remains a lot of interest in these practices from planners who are keen to buy into the accountancy space."
AUTHOR
Jason Spits
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