PORTLAND, Ore.--(practice values declined from a ten year historic high in 2009. The average multiple of gross recurring revenue paid for independent financial service businesses has risen steadily, to a high of 2.34 in 2009. In 2010, this average multiple declined to 2.31 (times trailing twelve months revenue for fees and/or trails). “This is a major event,” says CEO David Grau Sr., JD of FP Transitions. “Since the formation of our company more than a decade ago, the industry has been asking how much higher prices would go given the imbalance of buyers and sellers.”)--Despite a strong seller’s market for privately-held, financial service and advisory practices in 2010 (with a 50 to 1 buyer to seller ratio), overall
“Since the formation of our company more than a decade ago, the industry has been asking how much higher prices would go given the imbalance of buyers and sellers.”
Based on current market data from FP Transitions, which includes transactions from more than 50 different independent custodians and broker-dealers (including LPL, Raymond James, Wells Fargo, Schwab, Pershing, Fidelity, Ameriprise and TD Ameritrade), the value of the recurring income streams of financial service practices declined for the first time in the past 11 years based on 198 transactions FP Transitions was involved in during 2010 that involved the sale of all assets or stock in one transaction. These transactions ranged in size from $24,000 to $7.6 million in value, and the gross revenue multiple (GRM) paid ranged from 1.16 to 3.38, with an average multiple of 2.31 (the range in 2009 was between 1.30 and 3.20).
What’s Driving the Change
A number of factors are contributing to this overall lower multiple paid for practices, including the economic conditions in 2009 and general market uncertainty, a change in deal structures, the pending expiration of the Bush tax cuts, and the number of private deals.
Buyers of these subject practices in 2010 appeared to base their evaluations and subsequent negotiations primarily on 2009 revenue and performance, which tended to be lower than in past years. The possible expiration of the Bush tax cuts and expected increase in long-term capital gains tax rates also prompted advisors to request larger down payments, or even all cash deals, in exchange for a discounted sales price. As a result, deal structures shifted in 2010, with average down payments increasing to 32%, an increase of 10.3% over 2009, with the balanced financed over a period of 4.8 years. Finally, the reduction of practice values was also clearly affected by an increase in the number of private transactions led by experienced buyer groups. These consolidation efforts succeeded in acquiring practices from advisors willing to sell at lower than market rates in a private transaction. Open market transaction values (practices sold in a competitive listing situation), in contrast, actually sold at a slightly higher multiple in 2010, at 2.35 times trailing twelve months recurring revenue.
According to David Grau Sr., JD, “Our survey data indicates that while the industry as a whole is aging and is very interested in the idea of succession planning, less than 10% have actually developed and committed a feasible plan to paper. As a result, private buyer groups are able to dictate value and terms to the sellers who are often poorly prepared for a transition when they realize that their internal successor(s) (staff member or son/daughter) is not qualified and/or cannot afford to pay for the business.”
The following are key findings from FP Transitions review of 2010 transaction data:
- The average multiple of gross recurring revenue decreased by 1.3%, from 2.34 in 2009 to 2.31 in 2010, the first decline in over ten years.
- The average multiple of non-recurring revenue in 2010 was 1.08, with a range of .30 to 1.74.
- Average range of gross recurring multiples in 2010 was between 1.16 and 3.38.
- The Southeastern region of the US fared best in terms of value received, actually increasing to an average recurring multiple of 2.41.
- Less than 4% of advisors have ever had their practices professionally valued.
- Dually registered firms with diversified revenue streams, on average, were better able to adapt to market volatility than singularly focused firms, seeing the smallest decline in annual revenues after September 2008, and thus the smallest decline in values received in 2010.
FP Transitions, based in Portland, Oregon, is the nation’s leading provider of equity management, valuation and succession planning services for the financial services industry, and operates the largest open market for buying and selling financial service practices in the U.S. Working in cooperation with broker-dealers, custodians, clearing firms, and insurance companies, FP Transitions provides its services to independent and captive financial advisors, registered reps, and insurance agents of all sizes. As the creator of the open market listing system in 1999, FP Transitions has steadily broadened its service offerings and is now the leading provider of practice valuations and equity building tools in the industry. FP Transitions’ expertise also includes continuity planning, practice benchmarking, strategic consulting, performance coaching, succession planning, entity formation and maintenance, internal ownership track set up and management, and mergers and acquisitions.
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