Valuing risk practices

How are risk specialist practices currently valued?

The valuation or practices generally say compared to five years ago have fallen.

Having said that, over the last twelve months they have remained pretty steady and, in fact, at the margin for some small risk practices there has been a slight increase. That increase has mainly to do with supply and demand. So, the demand has definitely increased in 2015 and the supply has also increased a little bit.

Also, we are starting to see the increase in selling activity by single owner operators and a lot of the older life risk writers who probably see the education standards as their finishing point. So, they are starting to start the sale and succession of their business.

How much demand is there for these sole practitioner businesses?

There are a lot of people in the industry trying to buy smaller businesses and businesses with say less than 400,000 in trail. That would be the greatest number of people that are registered in our database as a buyer. And looking at our database, I would not be surprised if 80 per cent were registered to buy a business below 400,000 in recurring revenue. So there are a lot of people trying to buy small books to either start in the industry, or to grow.

When you have such a big demand it tends to affect the pricing, because supply is not super strong in that space. So there is more demand and there is probably a higher multiple applying to those businesses simply based on demand then there is for some of the larger businesses.

How does the demand for risk practices stack up against multi-disciplinary businesses?

I think it is neutral at the moment. When you buy a multi-discipline business, the integration is more complex because there is more risk involved. There is not significantly more demand for multi-disciplinary businesses, but there is perhaps greater demand for a single discipline business.

The industry is at an inflection point and there are a lot of single discipline advisory businesses looking to become multi-disciplinary to be able to cross sell clients because it is easier to deal with existing clients than find new ones. So we have a lot of accounting firms with financial planning businesses, we have seen a greater uptake of planning businesses moving into mortgage broking and vis versa. It certainly doesn’t affect the sale of a business negatively, but it means you have to find the right buyer who is already multi-disciplined or wanting to move into multiple disciplines.

There is always a lot of talk that older advisers are looking to sell – whether that be due to regulatory changes or other factors – but are there a lot of younger advisers looking to purchase those businesses to build up their client book or start a business?

I think there definitely is.

The conversations that we are having tend to be with people that are already advisers that are perhaps employees in banks or another practice. The conversation usually goes that they want to start their own business. So, they are really starting from scratch. Two reasons they are interested in a risk book are acquiring an existing client base and revenue to start a business because starting from nothing is a really long haul. The other reason is they want to buy a risk practice is there is the propensity to earn a lot of money off the recurring revenue via additional risk sales that may not be available if they purchase an investment book of clients .

For those looking to sell their business, are there any strategies you would recommend?

There are a few things that we find practice owners do really poorly when selling.

Business owners take a really long time to sell, the second is they negotiate with one party at a time hoping to get a sale and then they don’t have the right tools or use the right process to conduct the sale. Those things don’t go so well.

So, we find practice owners commonly do poorly when they go to sell if they don’t do the right preparation. There is always a lot of preparation that needs to be done to sell the business and prepare the business data. So, they prepare poorly which leads to a lot of time consuming work with buyers during the sale process. Also, advisers really don’t know what their practice is worth when they go to sell it, and then they often make mistakes when engaging buyers with positioning the value of their practice and what it is worth.

The other big area is who they talk to about selling their practice. Most start the process when someone taps them on the shoulder and asking when are they selling. So, they start a selling process by talking to just one party. They have a chat to us about what practices are selling for and they say they want to maximise their sale value and find the right home for their clients – but if they are only talking to one person, that doesn’t maximise their sale value. So, these advisers do not talk to enough prospective buyers to find the right fit.