A merger-and-acquisition expert claims principals put too much emphasis on the multiple factor when deciding whether to sell or merge a practice when they should be looking at the profitability of the business after it’s merged.
An analysis by M&A corporate advisory firm, Radar Results, indicates that large practices tend to be more profitable and efficient, with clients paying on average a far higher level of fees. Only those practices that had annual recurring revenue of at least $500,000 were included in the analysis.
The large practices, where total revenue was between $1.5 million and $4 million, had an average annual fee-per-client of between $5000 and $6000. The results reveal that the fee-per-client for smaller practices was far lower, between $1000 and $2000.
“The results from the analysis may help practitioners plan ahead and measure themselves against the industry average,” says Radar Results founder, John Birt.
“I’m not saying they should try and mirror the industry average, but at least they should know where they’re positioned and have a plan to exceed this average.
“I see a lot of inefficiencies in financial planning practices which can be overcome with technology and merging. The number of staff required today to run a good-sized practice would have to be half what it was 20 years ago.”
The research showed that the funds under management (FUM) for the practices analysed was $192 million on average, with the balance of each client’s account averaging $370,000.
The majority of the practices are located in Victoria, South Australia or Queensland, with New South Wales contributing only 13 per cent of the results.
“The larger practices, with revenue in excess of $1.5 million, would usually sell on a multiple of earnings before interest and tax (EBIT),” says Birt.
“The highest EBIT within the analysis, as a percentage of revenue, was 59 per cent, with the average being 33 per cent.
“The EBIT multiple paid today for a quality financial planning business has fallen significantly, probably sitting at around the four to six times.
“However, if you can improve the profitability of a practice, then the sale value of that practice today could quite conceivably be the same as it was several years ago, albeit with the multiple falling.”
Radar Results expects to see many more advisers selling their businesses before July 1, 2013, when the new FoFA regulations come into force.
There is a belief that the new regulations may have a huge impact on authorised representatives within respective licensee groups, preventing them from moving to another licensee, unless they want to trigger opt-in for all their clients – a situation that was previously grandfathered.
A survey earlier this year by Radar Results on the acquisition of financial planning practices revealed that the most popular size of recurring revenue sought is between $100,000 to $250,000 (39 per cent of 2488 respondents) followed by $250,000 to $500,000 (31 per cent).
The appetite to acquire larger practices of $500,000 to $1 million and over $1 million was suppressed as each polled only 7 per cent.
