According to the latest figures from financial services M&A firm Radar Results, there’s a growing valuation gap between advice firms, with an overarching theme that we’re now shifting to a buyer’s market.
As the firm’s report explains, "buyers now have a larger selection of sellers from which to choose and therefore, can negotiate lower price multiples and obtain better payment terms.”
What’s causing the gap?
The report says that the gap between “high-quality practice” and “conventional businesses” – defined as those that could have up to 20% grandfathered clients, who may not be engaged – has increased from 0.5x recurring revenue up to 1.5x recurring revenue.
Radar Results explains further: “After the Global Financial Crisis (GFC) finished, finance became easy to secure, interest rates fell, sellers were hard to find, and buyers were forced to pay a high price multiple for an acquisition.”
“During the GFC,” Radar Results continued, “many planning practices had their recurring revenue fall by up to 50% and revenue from new business disappeared. Therefore, planners who were looking to sell before the GFC remained in the industry until their revenue increased, contributing to the shortage of sellers during this 10-year period."
Is there a silver lining?
The report does also note that for those businesses considered “high-quality,” valuations “haven’t really changed, and there’s a higher demand now than at any time before.”
What this suggests is that there’s still significant demand in the advice market, but as we discussed last week, the means of valuing these businesses has become more complex in light of recent reforms and the Royal Commission.
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