In an upcoming episode of The ifa Show podcast, Forte Asset Solutions founder and director Steve Prendeville said the institution’s cuts to BOLR rates, which caused outrage in the adviser community, had also had a significant financial impact on those outside AMP who were selling their practice.
“Prices did come down and a large part of that was when AMP moved their BOLR from four times to 2.5 times,” Mr Prendeville said.
“The market average reflected that and we went from three times recurring revenue down to 2.5 times.”
Mr Prendeville said while more practices were starting to come on the market looking into 2021 and there was significant “demand inflation” for good quality businesses, valuation averages had stayed largely the same since AMP’s decision in late 2019.
However, he said EBIT valuations had “stayed constant” over the 2020 year at around six times adjusted EBIT, with supply of practices restricted by perceptions that the market had been flooded with exiting advisers.
“There was a market expectation that prices had collapsed and that was largely due to the adviser migration we saw – there was some 5,000 [leaving] in 2019 and 2,500 in the year to June 30, and with all those exits, it was naturally assumed that there must be mass selling,” Mr Prendeville said.
“That wasn’t the case – those exiting were predominantly salaried advisers in banks or accountants who were no longer able to operate under exemption, so there weren’t businesses for sale from those advisers.
“The other cohort was where AMP and other institutional groups had deemed if a business had less than $400,000 in gross revenue it was no longer viable, and in many of those cases those businesses had a large exposure to grandfathered revenue. Those businesses were often internally traded to known advisers or the adviser had simply walked away.”
Mr Prendeville said many practice principals had also taken the time to “re-engineer” their businesses for sale in 2020 rather than bringing them to market as is, hoping to get a better valuation by investing in technology and improved client relationships.
“The reason for the absence of supply was many businesses have had to re-engineer, they weren’t market ready,” he said.
“That started from grandfathered revenue and moving those clients to annual renewal, and when you do that you have to look at what your service offer is going to be, what technology do you require to do it and what your pricing is going to be.
“No one’s had the headspace to think about a sale, and then all of a sudden we’ve had to respond to COVID-19, which further increased the adoption of technology as we moved to digital meetings, Zoom and the like.”
I am sure Franky Holden’s parents are proud of him!
Frankie J Holden owns and runs a caravan park at Tathra on the NSW south coast at Tahthra with his wife. A bit of a change from his days in Ol’55 and TV presenting. He is 68 next Friday, pop in and ask if his parents are (were) proud of him!
I find it really curious that there are so few practices for sale. Are those with little hope of selling simply running down the clock? What are they going to do in October / November / December 2021? Walk away?
If average revenue multiples are 2.5 and EBIT multiples are 6, that seems to imply average EBIT margin for selling firms is 42%.
Have I interpreted this correctly? Is 42% EBIT typical for most practices?
In a Fin Review article in 2018 Mr Prendeville was quoted as saying “the industry benchmark for EBIT is 20 per cent”
Depends on NB vs RR. 2.5 multiple is normally RR only so if no NB then 42% EBIT. If RR is 80% to total then EBIT would be more like 33% to equal 2.5 which is more common for decent-sized practice. 40% EBIT is hard without high fee per client, low overheads or extreme scale – even with great systems. Most 40% EBIT businesses less than $2M are taking some shortcuts, mostly likely in portfolio management research.