Centurion Market Makers’ latest data indicated that the point at which advice practices could get the benefits of scale has increased “well above” $3 million in revenue, compared to $1.5 million in 2021.
“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.
As a result, the group said those considering a sale of their practice needed to focus on profitable client relationships that demonstrate a solid profit margin above the cost to serve, alongside repricing the low fee-paying clients and cleansing the client base of unprofitable clients.
“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.
The group pointed out that smaller-scale practices servicing lower-value clients are getting increasingly hard to offload as the dynamics of the advice industry have changed following the removal of grandfathered revenue.
“There has been a severe reduction in the profitability of clients at the lower end of the revenue range,” Centurion said.
“Our work indicates that practice owners generally believe it is very difficult to profitably service a client with a fee under $3,000 per annum.
“Clients much below this level generally detract from value and have fallen to below two times revenue if they can be sold at all.”
The group explained that 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.
Moreover, Centurion revealed that demand is increasing for premium fee-based client books.
“By way of example, a CBD client base of 100 clients with $1 million in fees could sell for over three times the fee base,” it added.
Regional assets, however, continue to achieve lower prices due mostly to the lack of market tension from multiple buyers, Centurion concluded.
