Risk insurance practices highly prized

Financial planning practices on sale are currently ranging between one and four times recurring revenue, with prices varying dramatically depending on specialisation, according to Radar Results.

Practices with risk insurance portfolios were king, said Radar Results principal John Birt. Risk insurance businesses in the city were currently selling for 3.5 and four times recurring revenue, while those in the regional areas were selling for three to 3.5 times recurring revenue, he said.

Those with retired investment clients have fallen in value, with prices in the city at 2.5 times recurring revenue and those in the regional areas at two times recurring revenue.

“A reducing investment-account balance as retirees live off their money, together with a lack of cross-selling opportunities, has seen them fall from grace,” said Birt.

Those corporate super practices currently have the least value at one to two times recurring revenue in the city and 0.5 to one times recurring revenue in the regional areas. After risk insurance practices, self-managed super fund practices are most valuable at three to 3.5 times recurring revenue in the city and 2.5 to three times recurring revenue in the regional areas, followed by accumulator investment practices at three times recurring revenue in the city and 2.5 times recurring revenue in regional areas.

According to a survey of about 100 businesses considering selling, about one third did not provide a clear sale price, Birt said. The rest were looking for between two times and four times recurring revenue, with an average price of 2.79 times recurring revenue, he said, adding that this was the asking price — “the eventual sale price being somewhat less”.

“Sale terms will also change, from the seller requiring only a 20 per cent clawback to meeting halfway at 25 to 30 per cent. Instalment payment terms will also alter during the sale-negotiation phase, possibly ending with a final instalment after one year — whereas the purchaser may have originally required two years,” he said.

Birt said that in future financial planning practices would move away from the recurring revenue scenario.

“Looking ahead, total revenue and EBIT [earnings before interest and tax] will form the new valuation methods,” he said. “The larger practices and institutions will consume the smaller players, and recurring revenue valuations will disappear.”

In terms of buyers, Birt said they were more cautious that the practices they were buying performed.

“The ability to increase the revenue by selling aligned products, a better value proposition through IT enhancements and reduced expenses from dealer’s fees have all encourages quick growth by acquisition,” he added.