Are advice firm valuations plummeting?

Alex Burke,  Senior Writer,  No More Practice Education

Recently, Connect Financial Service Brokers CEO – and NMPEducation contributor – Paul Tynan spoke with The Social Adviser founder Baz Gardner about why valuations for financial advice practices may be changing.

In a wide-ranging discussion, Tynan and Gardner covered firm financing, valuations of grandfathered commissions, the importance of soft skills and the relative value of accountancy practices. At the outset, Tynan talked about his experience helping advisers sell their businesses, and how recent regulatory changes – plus the Royal Commission – have shaped this process.

These days, he explained, if a firm comes to him, he values their business in “three pots.”

The three pots

“In one pot,” he said, “we have fee-for-service, and around that fee-for-service we put a multiple. In the second pot, we have grandfathered commissions, and around that we put a multiple. And in another pot we have risk business.”

He said that we have a “new world of risk,” where in 2021, “both political parties say they’re going to have a review. [And there’s also] the new terms that started 12 months ago. So you have to do the valuation like that.”  

Other factors and valuation overlays

Once the “three pots” have been assessed, Tynan said there are other factors to consider. “For example,” he said, “is it in rural Australia? Because if so, you have to do a discount, because there’s a lack of buyers and capital. Some banks have said quite openly they’re not lending to regional Australia. So you have to take that into account as well.”

“Even five years ago,” he continued, “it was one multiple across all products and where the revenue is coming from. But even recently, with fee-for-service, one of the biggest changes that came out of Hayne’s Royal Commission is the opt-in going from two years to one. That has driven the price down even more.” Before this change, Tynan said, there was more “certainty in your risk book.”

The serviceability of smaller clients

Tynan added that even at the smaller end of the market, he’s been finding a lot of business owners looking to sell. The problem is, given the raft of recent regulatory changes, it’s been harder to find buyers for these businesses.

“I just completed a sale and the buyer didn’t want the bottom 50 clients,” he explained, “because he couldn’t service those 50 clients under the new regime, so what we had to do was do the transaction and move those 50 clients aside into a separate package.”

“I’m seeing a lot more of that,” he said. “A lot more financial planners around the country saying that under the new regime, it’s impossible for me to service all my clients, so they’re cutting them off.”

You can watch the full discussion, along with other videos on The Social Adviser channel, here.


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