A marked improvement in the quality of advice books and an industry-wide desire to scale up are behind a significant increase in demand for advice businesses according to mergers and acquisition experts.
As the advice workforce has contracted and regulatory changes like the banning of grandfathered commissions has skimmed poor quality advice books from the market, M&A consultants report much cleaner, more profitable advice businesses across the industry.
At the same time successful mid-sized firms are searching for scale to alleviate high costs associated with elevated compliance standards, bloated professional indemnity costs, increased licensing costs and a blown-out adviser levy.
“In 18 years I’ve never seen the level of demand I’m seeing now,” says Steve Prendeville from Melbourne’s Forte Asset Management. “I recently had a business with about $500K to $1 million annual revenue listed and I’m looking at around 50 potential buyers.”
The average price for an advice book has risen from 2.5 X revenue to 3 X revenue in the last year, Prendeville estimates, primarily because the advice businesses available now are better engineered.
“Every business is improving,” he says, adding that buyers are recording 98 per cent client retention nine months post-transaction.
“Businesses are moving forward with technology, they’ve moved to annual renewals, advisers are all qualified and fixed fees are becoming more prevalent which moves out market volatility. The entire client proposition has improved across the industry, no one has passive clients anymore.”
According to Greg Quinn, executive director of advice at Chase Corporate Advisory, well-capitalised self-licensed advice groups are keen bolt these quality client books on to their business.
“The larger self-licensed firms with $5 million to $15 million revenue and 8 to 10 advisers, they’re the acquisitive ones,” he says. “They’re also generally repeat buyers, taking them in and tucking them in. They’ve got it down to an art.”
Quinn agrees that the businesses left standing are much better quality than two or three years ago. Demand is the highest it’s been in that span, he says. “If I had ten businesses to sell I’d sell all ten.”
Accru+ partner Tim Lane reports a “huge” increase in demand prompted by the desire to scale up. The businesses on the market are much more desirable now, he reports, while the supply level has dried up markedly.
“The revenue streams are very pure; in our last 6 months of valuations there’s been no adjustment for grandfathering or fee issues at all, the adjustments have been more normal. Rebates and grandfathering are gone, the income is really clean.”
Concerns that a flood of advisers selling up to escape the FASEA mandate has failed to materialise, the consultants say.
“I haven’t had anyone in the last two years saying FASEA has got anything to do with it,” Quinn says, adding that the advisers exiting the industry either don’t have scale. simply want to retire.
Prendeville says the idea that FASEA would cause hundred of businesses to hit the market at once and depress prices was misguided.
“Everyone thought valuations would collapse because of the advisers leaving, but they haven’t been business owners,” he explains. “They were salaried institutional advisers or accountants under limited licenses, or else they were older advisers looking at retirement who already had a succession plan.”
The new fee consent regime that started on July 1 won’t move the needle on valuations either, he reckons.
“Getting clients to sign isn’t really a risk because of the quality of books,” he says. “The clients that are there are really engaged.”
Even if an advice group purchased a book that lost clients during the 12 month transition period to fee consent rules, Lane says it would come straight off the price via clawbacks embedded in the contract. “It used to be done on overall revenue but now contracts have clawbacks that are more concentrated at the client level