Centurion Market Makers’ latest data indicated that clients being serviced for less than $3,000 a year were detracting from practice values due to the admin time required to service them, with a register of clients below $1,000 a year often not attracting any buyers.
“There has been a severe reduction in the profitability of clients at the lower end of the revenue range,” the advice business broker said in a recent blog post.
“Our work indicates that it is very difficult to be profitable with a client with a fee under $3,000 per annum. Clients much below this level generally detract from the value and have fallen to one to two times revenue – below $1,000 would be less than one times, if they can be sold at all.
“The key acquirers in the market have a detailed understanding of their cost to serve and will price acquisitions accordingly, often applying a nil or negative value to small unprofitable clients.”
The firm noted that the removal of grandfathered remuneration had affected profit margins in the sector and pushed up the point at which advice practices could get the benefits of scale.
“The point of scale for any practice has materially increased. This means that the revenue point where a practice starts to get the benefits of scale has increased,” Centurion said.
“Anecdotally, this would be well above $1.5 million in revenue.”
As a result, the group said those considering a sale of their practice needed to focus on a clear and demonstrable value proposition that would be borne out in the profit per client.
“The key issue is that a discerning acquirer market has become even more discerning. Perceived risk has an inverse relationship with value. So, the higher the risk, the lower the value,” Centurion said.
“As a result, vendors need to focus on the following profitable client relationships that demonstrate a solid profit margin above the cost to serve, cleansing the client base of unprofitable clients [and] focusing on a clear client value proposition so that an acquirer can transfer the client easily.”
This looks like a realistic, well done study.