
Financial advisory firms in NZ are typically trading between one- to four-times recurring revenue depending on income source and a range of qualitative factors, according to a new report published by the Milestone Financial group.
The Milestone analysis shows insurance-based advisory firms tend to secure the higher-end recurring revenue-based prices while those practices where average per-client annual fees amount to $3,000 or less sit at the lower end of the sales spectrum.
“It is not easy to accurately compile this sort of information in the NZ market because transactions are usually executed privately,” the report says. “The multiples above are based on discernible transactions in the New Zealand market over the past 3 years and from Australian sources over the 2020 calendar year.”
Recurring revenue tends to be the most popular valuation model in NZ, especially for the one- to two-adviser businesses that represent the majority in this country, but the Milestone ‘Future ready’ study says prices referencing gross underlying profit – earning before interest and tax (EBIT) – are also increasingly common.
Profit-based multiples range from four-times for a minority holding in a larger business to seven-times for big financial planning firm.
“While the partial equity multiples are sourced from Australia, a larger business in the NZ context will be generating revenue in excess of $2.5M and therefore the numbers above could well apply here,” the report says.
In general, financial advisory firms sell at higher multiples than other professional services businesses such as accountancy, according to the paper.
The Milestone study, which covers broader succession-planning issues, comes at an opportune time in an industry poised for generational and regulatory change.
As well as valuation methodologies, the comprehensive report covers more qualitative factors involved in financial advisory business merger and acquisition deals such as cultural fit and disclosure expectations.
“The financial services industry is facing a rejuvenation process.
With the average age of private practitioners well into the late 50s, there are many opportunities for young and old to work together towards mutually assured success,” the report says. “Ensuring these opportunities are correctly assessed, developed and fulfilled can be difficult however.”
The paper also includes a number of real-life case studies to illustrate some of the dos and don’ts in buying or selling advice businesses.
Richard Holden, Milestone principal adviser, says in the report: “There is much to learn from shared experiences. Those within should help clarify approaches and inform decisions on how to make the big moves in your adviser career.”
Milestone operates as a national joint venture co-operative featuring five core firms, two ‘aligned’ businesses and 12 other practices using the group’s services but remaining under their own brands.
Overall, the network represents some $1.5 billion of investment assets and $5 million of annual recurring insurance revenue.
“Milestone practices have completed 21 business succession transactions, with eight JV transactions involving transfers in and out of the group. We have conducted due diligence on a further 30 businesses,” the report says. “Through this process, we have looked at many high-quality businesses and encountered a wide range of succession environments.”