We regularly receive enquiries from readers who are considering selling their practices.
One of the big problems is establishing a fair value. This is normally determined by the turnover of the business, and recurring income.
Short-term practices are normally a lot easier to evaluate, given the fact that commission is paid on an as-and-when basis. Businesses which earn mostly upfront commission have to rely mainly on trail commission.
The proposals in the Retail Distribution Review envisage a change from upfront commission on life risk business to a 50% upfront fee and the balance of the commission to be paid as-and-when. It also proposes that commission on investment business be replaced by an upfront advice fee, and ongoing service fees.
The implementation of these changes will not happen overnight. Perhaps it is worth considering a gradual switchover to the proposed new format, rather than being forced to do so overnight.
The following article appeared in the Australian ifa newsletter on Tuesday, and confirms a point made by Moonstone’s Billy Seyffert during his RDR workshops:
Financial planning practices will continue to attract a premium sale price relative to other professional services firms, consultancy Centurion Market Makers has predicted.
In a market commentary on practice sales in the financial advice market, Centurion said there are a number of distinguishing features that make these businesses more attractive than other comparably-sized enterprises.
In particular, the report points to monthly recurring revenue with “little seasonality” along with low bad debts, low levels of working capital, zero or little inventory and stock, and low “plant and equipment costs”.
“Unlike many other small businesses, including other professional services firms, financial planning practices tend to exhibit some key differences in regards to financial performance,” the report said.
“It could be expected that Financial Planning [businesses] will continue to trade at a premium to many other small businesses and other professional service firms.”