Recent regulatory and other market changes have led to an increase in demand for forensic accounting services. This increase has been evident not just in the financial planning practice space, but in every area of business.
In the financial planning space, there have been two major drivers of forensic accounting services when it comes to business valuations. The first was the GFC, which really prompted people to focus back on what the true drivers of value are. At the end of the day, this really comes down to risk and return. The GFC has really shone the light on risk, and this is a key driver in business valuation trends. As potential acquirers that there is more risk in the marketplace, they’re not prepared to pay as much.
Regulatory change is also another potential risk for those in acquisition mode. The financial planning industry has for years basically sat on annuity streams by way of trailing and other commissions. This led to a situation where people would just simply sell these annuity streams on multiples of what these revenues were, because the perceived risk attached to these revenue streams was pretty minimal.
However, with Future of Financial Advice reforms coming into play, you can’t be certain that you’re going to maintain that continuing annuity flow. So there is more risk attached to those revenues, and this is changing the focus from ‘rule of thumb’ valuations, based on a multiple of revenue, to valuing businesses on what their true profitability is and what their true returns are likely to be.
