Demand for advice businesses greatly outweighs supply according to experts in the advice M&A space, with relatively few advice businesses looking to leave the industry.
With a net loss of over 10,000 advisers since the start of 2019, Forte Asset Solutions director Steve Prendeville says surging demand is counter-intuitive to what many were expecting in 2022.
“Supply is still low on a historical basis,” Prendeville says. “[Potential sellers] must have thought there was going to be a heavy supply and that must have had a relatively devastating impact of valuations.”
The reality is the vast majority of industry departures didn’t have a business worth selling or one to sell at all, so there has not been a “flood of businesses” looking to sell.
“They were salaried bank advisers, accountants operating under exemptions, businesses under $400,000 [in revenue] or exposed to grandfathered revenue,” Prendeville says.
The FASEA regime has been a contributing factor according to research from Growth Focus, which found 15 to 20 per cent of businesses cited the education standards as a reason to sell.
“It’s certainly not a tsunami,” Growth Focus managing director Steve Fine says. “It’s not the mass exodus many have predicted.”
Scale up to survive
For smaller firms the rising costs to do business are a major contributing factor leading them to either merge with similar businesses or be acquired by a larger business.
Mark Witt, Practice Exchange managing director, says the cost of operating an advice business has risen so much over the last three to five years that it meant smaller firms needed to scale up to survive.
“With fixed and semi-variable costs rising so much, it’s made it uneconomical for the smaller operations to exist in the marketplace,” Witt says.
“More sole proprietors will leave the industry or will seek to merge or create joint ventures with similar firms to split some of those costs.”
Market heating up
Witt says the Covid-19 pandemic made it difficult to conduct business, but 2022 should offer more flexibility to conduct deals.
“In the market there is pent-up demand from buyers and venders looking to sell,” Witt says. “We’re getting a lot more inquiries this January where we weren’t getting the same last January.”
Prendeville says the market shifted during the last quarter of 2020 with an increase of supply that still doesn’t match demand.
“We’re still not at pre-2019 levels which we would deem to be a normal market,” Prendeville says. “The demand is substantially in excess of supply.”
“If I was to list a business in any capital city, we’d have somewhere between 40 to 50 enquiries for a single asset for sale.”
Valuations
The increased demand from buyers and lack of supply has not resulted in improved valuations of businesses.
Whlie the range of valuations is dependent on several factors, including location, quality and quantity of clients, all four observers found valuations have dropped across the board compared to before the royal commission.
Witt says he has seen valuations sit at around two to three times recurring revenue, as opposed to 2.5 to 3.3 times three to five years ago.
“I’m not sure that’s going to change in the next 12 months, but the quality ones will push up towards three times,” Witt says.
Fine agreed that multiples are lower than they were one or two years ago, but he says they are now stabilising.
“The [current] range is quite broad, from 2 to 2.7 [recurring revenue],” Fine says. “In exceptional cases there are outliers higher than that.”
Prendeville says he is seeing businesses go back to the historic levels of three times recurring revenue.
“Last year we were averaging 2.5 times recurring revenue, and it’s not due to demand inflation, it’s due to better businesses been designed.” he explains. “Every practice has been forced to look at their value propositions.”
John Birt, Radar Results chief executive, says he has seen a transaction go through at 2.8 times and one seller has asked for three times recurring revenue.
“Generally younger [clients] around 30 to 50 years of age command the highest multiples and they tend to be going around 2.5 times,” Birt says.
