How COVID is hitting practice valuations

Centurion Market Makers believes there won’t be a long-term hit to business valuations from COVID-19 unless income – and future profitability – have been negatively impacted by the pandemic, either through inability to write new business or extended delays in doing so.

“Whilst most believe businesses are sold on a recurring revenue basis, and that new income is irrelevant, most new income is converted to some level of recurring revenue in the second year,” said Fiona Ettles, a chartered accountant at Centurion. “This both builds recurring revenue and replaces client drop off.

“We have seen some great adjustments to businesses over this time, and some advisers finding technology usage is making them more efficient, with new and old clients – this may lead to an improvement in valuations over time.”

Practices have been hit by market volatility, but for the most part haven’t experienced an impact on their “responsiveness or ability to transact”.

“Essentially, the future is still uncertain, but we believe financial services businesses have come through as well as possible,” Ms Ettles said. “Strong client relationships, fixed fees that have been discussed and are value based, and the ability to adapt and continue working/servicing clients – even from home, put the industry in good stead.”

Centurion believes that quality practices – that is, practices with good systems and processes, and average client fees in the vicinity of $3,000 plus per year – are continuing to hold their value, despite the impact of the royal commission, FOFA, FASEA, and “general public scrutiny”. However, those changes have also made the market “more discerning”.

“These changes have made the market more discerning, it’s flooded with small advisers with small books, and low client fees, wanting to exit and not complete further study – buyers can pick these books up cheaply, but the costs to service and embed are large – and they’re not their ideal clients – they’re not attractive,” Ms Ettles said. “The market is looking for client bases that have ideal clients – those on consistent platforms, with advice-based fees, with an ability to transfer relationships.”