Now might be a good time for mature planning practices to consider either activating a buyer of last resort agreement, if there’s one available to them, or engaging with potential buyers in advance of next February’s recommendations from Commissioner Kenneth Hayne, a specialist consulting firm argues.
“One thing advice practices often underestimate is the amount of time it takes to transition a business through a sale process,” Greg Quinn, executive director, advice channel, at Chase Corporate Advisory, said. “Also, we think the terms these businesses are likely to get now will be more favourable than the terms they can expect after February next year.”
Quinn is speaking to a number of advice practices in the vicinity of $3 million in annual revenue that are looking to sell. Most of the practice principals within these businesses are 60 years and older, he said.
He believes advice practice valuations could suffer if practice owners and principles wait until the Royal Commission into Misconduct in the Banking and Financial Services Industry final report and recommendations are released, which is expected next February.
Quinn and Chase co-executive director Marcelo Fernandez emphasised that, overall, advice fees would fare better, from a valuation perspective, than commissions, which they said would be exposed to more risk going forward.
“Commission valuations will come under more pressure from buyers as risks around the future of these income streams develop,” Fernandez said.
Quinn added: “I think there is a risk for practices, particularly those with relatively high commission revenues, that the three-year transition to banning grandfathered commissions the [Financial Planning Association] FPA is recommending could be a best-case scenario for the industry.”
The FPA made a recommendation in its submission to the royal commission that grandfathered commissions should be banned within three years.
Quinn uses 3-3.5 times recurring revenue or 6-7 times normalised earnings before income and tax as a rough “middle point” benchmark to express how potential buyers of advice practices are thinking about valuing different types of income at the moment.
Advisers with a mix of highly engaged fee-paying clients and less-engaged clients paying commissions might look to sell for valuations at the upper end of the range for the fee-paying portion of their client roster.
Smaller businesses with less than $3 million in annual revenue can expect at least a one-year earn out period, whereas businesses with more than $3 million in revenues could negotiate two-year earn outs and large businesses in the $7 million annual revenue realm should expect three-plus year earn outs.
During an earn out period the buyer may pay an agreed-upon percentage of the business’ sales or earnings to the seller in addition to the buy price.
In the local advice industry practices are at various stages of transitioning from grandfathered commissions into alternative fee models, Quinn notes.
Some practices that earn more than 50 per cent of their ongoing revenues from commissions might find they have a long tail of disengaged clients, which might be less valuable to a buyer these days than a practice with, say, just 10 per cent of revenues coming from commissions.
“Because there is so much uncertainty around commissions at the moment, a buyer might have a three-year transition period built into the terms of the deal and pay the seller for clients paying commissions only once they’ve actually agreed to engage with the new owner for advice,” Quinn notes.
Comments from Quinn’s interview will be included in a feature on the implications of a ban on grandfathered commissions in the July issue of Professional Planner magazine.
