Advice business professionals have differing opinions on the effect looming changes to Ongoing Service Agreements is having on valuations, with little agreement on the average price for a quality firm and the factors behind it.
Hayne’s royal commission final report recommendation that opt-in periods become annual, instead of every two years, is a particular bone of contention with mergers and acquisition experts.
Paul Tynan, chief executive of Connect Financial Services Brokers, says that the opt-in recommendation has driven the price of advice firms down “more than anything else”.
Speaking on a podcast with Baz Gardner from The Social Adviser, Tynan said the mooted change from ongoing service agreements to annual service agreements was “the biggest change [stemming] from the royal commission”.
“It’s pushed the valuations down because you’ve got to engage the client every year instead of just issuing an invoice,” Tynan tells Professional Planner.
He says advisers will be increasingly unable to service the bottom half of their revenue books – the threat of which is limiting the asking price for sellers.
“I’m getting a lot of people saying ‘I have these 200 clients I can’t service anymore’,” Tynan reveals.
Tynan says practice values have come down considerably in the last year and are being sold at revenue multiples “nowhere the threes”.
“It’s always been 2.5 to 3.5 [revenue multiples] but that changed since the royal commission,” he says. “I would say the average multiple for a fee-for-service business is around 1.5 to 2.5.”
No real effect
Tynan’s contemporaries are more bullish on current valuations. John Birt, principal at mergers and acquisitions consultancy firm Radar Results, says “good quality advice businesses still command between 2.5 and 2.8 x recurring revenue”.
This is a drop from “around 3 to 3.2 x three to five years ago,” he adds.
“If you’re talking about quality advice firms with no grandfathered commissions then prices are quite stable,” Birt believes.
The spectre of annual OSA’s “hasn’t had any real effect,” he says. Valuations have gone down, but this is due to tighter lending restrictions rather than the threat of changes to contracting arrangements.
“When we started Radar Results 13 years ago it was a seller’s market, from about 2006 up until about a year ago,” he says. “Then the banks decided they weren’t going to lend as much to planning businesses.”
“We’re probably receiving two to three sellers per week now,” Birt reveals. “Five to eight years ago we’d get one per month, now we’re getting ten.”
Birt reckons the royal commission has also had a broad effect on valuations, together with new requirements from the Financial Adviser Standards and Education Authority.
“But the change of the opt-in rule hasn’t done anything at all,” he says.
Reduced risk
Steve Prendeville, managing director of consultancy firm Forte Asset Solutions, says he “completely disagrees” that the prospect of annual opt-ins for OSAs is hurting advice practice values.
The mooted changes are actually increasing practice valuations, he says, because they shift business remuneration towards fixed fee models and away from funds-under-management arrangements that leave the firm susceptible to market fluctuations.
“The report said the OSA should show the services for the next 12 months and the specific price, which means were moving to fixed fees and annual engagement,” Prendeville says. “Both of those initiatives are affirming for prices.
“As soon as you introduce fixed fees you’ve actually reduced risk to that revenue,” he continues. You’ve uncoupled from economic influences, because on a fixed fee basis the market can go up or down and it doesn’t affect the value of the business.”
Prendeville says “good businesses” are still getting a high premium.
“We had a transaction at 3.5 times in December, but that was a high-profit business,” he says. “But lesser quality businesses are still coming into the market at 3 times.”
If there has been a reduction in valuations, Prendeville believes, it should be attributed to another likely outcome from the royal commission – the abolition of grandfathered commissions.
“I’m currently placing zero value on grandfathered revenue,” he says.
