FP Transitions Data Shows Practice Value Rebound in 2011

PORTLAND, Ore.--(BUSINESS WIRE)--

Practice values rebounded in 2011, supported by strong demand (52 to 1 buyer to seller ratio) for privately-held, financial services practices. The average multiple of gross recurring revenue paid for independent financial service practices increased steadily in eleven of the past twelve years, to a high of 2.34 in 2009. In 2010, this average multiple declined to 2.31 (times trailing twelve months recurring revenue), before rebounding to 2.33 in 2011. “Despite the volatile economy in recent years, the value realized by owners of independent financial service practices has been strong and reliable,” said Brad Bueermann, Executive Vice President and Principal at FP Transitions. “That's good news for those thinking about retiring, and it is also good news for the buyers investing in these businesses.”

Based on current market data from FP Transitions, which includes transactions in 2011 from more than 47 different independent custodians and broker-dealers (including LPL, Wells Fargo, Raymond James, Schwab, Pershing, Fidelity, Ameriprise and TD Ameritrade), the value of the recurring revenue streams of financial service practices increased based on 176 transactions FP Transitions was involved in during 2011 that involved the sale of all assets or stock in one transaction. These transactions ranged in size from $20,000 (partial book sale) to $3.2 million in value, and the gross revenue multiple (GRM) ranged from 1.52 to 3.25, with an average multiple of 2.33 (the range in 2010 was 1.16 to 3.38). The average gross revenue multiple paid for non-recurring revenue in 2011 was 1.13, with a range of .67 to 1.90. The average number of clients transitioned per practice was 157.

A Shift in Deal Terms

In addition to the increase in value, transactions in 2011 were supported with stronger deal terms. The average deal structure for transactions in 2011 relied in part on seller financing including a 36% down payment with 55% of the balance financed using a promissory note, and just 9% of the deal financed using an earn-out arrangement. In 2010, the average deal structure utilized a 32% down payment with 47% of the balance on a promissory note and 21% of the purchase price financed using an earn-out arrangement. The length of seller financing declined from 4.8 years in 2009 and 2010 to just 4.1 years in 2011, a reflection of the larger down payments and buyer risk in the transactions.

The improving deal terms also reflect an improvement in the revenue quality of practices for sale. Over the past twelve years, the average recurring to non-recurring revenue ratio has gradually improved to a current 70/30 ratio from approximately 55/45 in 2003-2004.

According to Brad Bueermann, EVP, “We are seeing businesses of higher quality relying on a competitive, open market to find their best match and, subsequently, the best terms for the business they have spent a lifetime building. Selling a financial services advisory practice at some point is a good decision for the founder and the clients he or she serves – if it is done right.”

The following are key findings from FP Transitions review of 2011 transaction data:

• The average multiple of gross recurring revenue increased from 2.31 in 2010 to 2.33 in 2011, the eleventh increase in the past twelve years.
• The average multiple of non-recurring revenue in 2011 was 1.13, with a range of .67 to 1.90.
• The Southwestern region of the US fared best in terms of value received, actually increasing to an average recurring multiple of 2.42.
• Less than 6% of advisors have ever had their practices professionally valued, but this is an increase of 33% over the prior year. FP Transitions performed 841 formal valuations in 2011.
• The most active States in terms of number of sellers of financial service practices include: California, Colorado, Texas, Washington, Georgia, Nevada and Virginia.

ABOUT FP TRANSITIONS

FP Transitions, based in Portland, Oregon, is the nation's leading provider of equity management, valuation, private consulting, 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. Since opening its doors in 1999, FP Transitions has completed more financial service transactions than any investment banker or business-broker in the country. FP Transitions' expertise also includes continuity planning, practice benchmarking, compensation studies, internal and external succession planning, entity formation and maintenance, internal ownership track set up and management, equity compensation strategies, and mergers and acquisitions.

The firm also specializes in the valuation and analysis of intangible, privately-held, financial service based businesses, and has completed over 3,000 valuations and more than 600 benchmarking studies. In the course of its work, FP Transitions has developed and utilizes one of the largest practice management and operational databases in the financial services and insurance industries. FP Transitions works with independent broker-dealers, registered investment advisors, custodians, and insurance providers, and their representatives, advisors, and agents to develop and implement business transition systems and procedures and equity-based valuation solutions.