Practice valuations hold firm amid depressed economy

Forte Asset Solutions founder and director Steve Prendeville said despite the exit of a significant proportion of advisers last year, improving business growth as a result of the pandemic had seen practices hold their value.

“Contrary to common belief, valuations have not fallen,” Mr Prendeville said.

“This year has actually been quite a positive and affirming year for our industry - we’ve never been in greater demand, client contact has been substantial, so we’ve got engaged clients and we’ve got new clients. This is the first time we’ve really started to see organic growth come.”

Mr Prendeville added that the retirement of around 5,000 advisers in 2019 had not created as much of an oversupply of practices on the market as people assumed, as many of these had been employed by the major institutions.

“What should be remembered is those advisers were predominantly salaried advisers, or advisers that had very small income streams, and as such they never came to the open market,” he said.

“Our reality has been that we’ve got significant under supply and significant demand.”

Mr Prendeville said that while 2019 had been “the worst year we ever had” with average practice valuations declining from three times to 2.5 times recurring revenue, the COVID-19 crisis was actually forcing advisers to future-proof their businesses and improving valuations as a result.

“We’ve seen the adoption of technology [like] Zoom for instance, which has increased efficiencies but also our ability to communicate in a large and effective manner,” he said. 

“This is all affirming for valuations, [because] what’s happening is better businesses are being built, more robust businesses with closer engaged clients that are showing growth. [And] there’s less participants, there’s greater barriers to entry.”

However, he added that while capital was still available to fund a business purchase, lenders were slow to process finance because of the extra demand on banks as a result of the economic crisis.

“It’s a little bit slower and that’s mainly because of the uptake in the government guaranteed SME loans,” Mr Prendeville said. 

“A lot of the specialised financiers have been seconded to assist in small business loans. Offshore capital has also slowed down – that is mainly due to the Foreign Investment Review Board [scrutiny] of all transactions irrespective of size, and that will be for the next six months.”