Market Commentaries

Issue #5 : 2012/13 Financial Year Market Commentary


Forte Asset Solutions

The expertise of Forte is forged from the personal experience of Steve Prendeville selling his own national Dealer Group and Financial Planning Business Deloitte Financial Services in 2001 when he was a partner of Deloitte Touche Tohmatsu. Steve was the founding partner of Kenyon Prendeville in 2003 and in May 2011 Steve sought to evolve the business model to the next level and created Forte Asset Solutions.

Thank you for your continuing support.

Steve Prendeville

Forte Asset Solutions
Tel: 1300 858 996

2012-13 Financial Year Market Commentary:


The year can be best described as a year of great contrasts. From significant institutional turf or distribution war to the current period of relative peace, cheque book recruitment once highly visible now largely ceased, a financial year that started with great promise but finished with falling markets and lower confidence.

It was also a period of less M&A activity than previous years and this could be due to deal digestion issues. Several of the institutions that had made multiple acquisitions in the last few years may not have achieved the synergy benefits expected and have experienced management issues greater than expected. It is widely believed that there will be significant write-offs against assets acquired by some of the institutions over the last few years.

Multiple reasons can be nominated for the decrease in the level of M&A activity – the uncertainty of dealer valuations in the face of multiple collapses, FOFA changes and risk to revenue, margin compression due to rise in compliance and PI costs, quality of assets, proliferation of Dealer Groups for sale and the many public failures to sell. There was certainly no supply issues as most mid-sized dealer Groups explored sale options.

The year saw the collapse of several dealer Groups – AAA Financial Intelligence, Morrison Carr, Wickham Securities, AFS and the closure of Whittaker Macnaught and Enforceable Undertakings taken against CBA, Halifax Investment Services and Macquarie Equities. Additionally many groups also accepted conditions placed on their licences or changes to their management structure.

The proposed merger of SFG and WHK was deferred or potentially abandoned. However SFG did acquire Lachlan Partners in February 2013.

A quiet calm has come over the institutions and this could be due to new management or uncertainty of the future legislative landscape and valuations.

There were however a significant number of acquisitions within the Financial Services Technology sector.

There was further consolidation in the Industry funds with the merger of Australian Super and Aust (Q).

Commonwealth bank increased their shareholding in Aussie Home Loans from 33% to 80% for reportably $277m with an option to take up the full 100% in 2016.

It is rumoured that one large play is currently underway, but other than that the market is largely looking internally to process and adapt to enforced changes.

Whilst the big end of town may have gone quite it is also true of the small medium sized enterprise market as well.


Forte Asset Solutions experienced a significant spike in businesses seeking to sell in November of 2012 and February of 2013 and this was largely influenced by the deferment of retirement plans due to the GFC and the subsequent rebound in equities markets and the corresponding recapturing of lost values.

The increase in supply was met warmly by the many buyers who had been seeking assets to acquire unsuccessfully for an extended period of time.


Demand has been constant in the author’s 11 years’ experience until the last quarter of the financial year 2013.

For the first time we are seeing what can be described as a buyers’ market. Buyers are able to dictate terms and conditions that are without precedence.

The reason for the sudden and quite dramatic reduction of buyers is a direct impact of FOFA and specifically due to Regulatory Guide 245 regarding Fee Disclosure Statements (FDS) introduced from the 1st July 2013.

Many if not most businesses in the industry are unsure of their capability to adequately meet the requirements of FDS and this is due to their software systems ( CRM and brokerage) not being interconnected or sufficiently threaded to allow for the delivery of statements to clients of how much has been paid and what services have been delivered.

If you are not comfortable about your own business delivery systems you are not going to buy someone else’s.

The other consideration is that the FDS could be a threat to future revenue with clients not recognising value to fee delivery and voting with their feet. This risk has been reflected in the terms and proportion of the deferred considerations.

FDS is certainly leading to increased compliance and operational expenses and how much additional time investment and cost of delivery is still largely unknown by many.

It was also thought that new clients would not be eligible for volume overrides however a last minute change ”grand- fathered” some of the conflicted revenue changes for another 12 months.

Forte believes that the change to buyer demand is temporary rather than a longer term fundamental change to market conditions. Software providers will eventually be able to deliver on FDS and with this addressed, market conditions will likely return to historical average ranges.

How has this demand impacted on practice valuations? The answer is it hasn’t yet; Vendors in most cases do not have to sell so they will not until an acceptable valuation and terms are achieved. This has meant that businesses for sale are “in market” for a longer period, instead of 3 months it now takes 6 months on average to progress from search to Heads Of Agreement.

Given that the change of demand is recent, the March to June 2013 experience has not yet impacted transactional outcomes. What has been an influence to prices achieved over the last 12 months has been the relationship of profitability to the Recurring Revenue Multiple that has been applied.

The following is an article that was published by Evo Media in June 2013 that addresses this important relationship.

Recurring Revenue or EBIT as the emerging and future determinate to Practice Valuations

EVO Media Article

Forte Asset Solutions recent experiences supports Business Health’s research findings that EBIT (Earnings before Interest and Taxation) and valuations are delivering higher valuations.

The findings are due to every business in the last 5 years having to focus on cost structures and profitability for survival and with the increase in FUM over the last 9 months or so owners have been rewarded with higher EBIT’s. The last 12 months has witnessed the return of new investments being made and in many cases in a new fee for service environment.

The research found that the average multiples for Recurring Revenue was 2.8 times and EBIT 6.7 times. Forte’s reality has been within 10% of these nominated ranges, specifically we have found the average to be 3 times recurring and 6 times EBIT- however we make an important point of clarification.

No transactions have been contractually entered into on an AEBIT basis (Adjusted EBIT).

All transactions in the past 2 years have been done exclusively on Recurring Revenue basis and the transactions in negotiations currently are also being assessed on a Recurring Revenue. However this is primarily for practical and contractual purposes

However this is not to suggest AEBIT has not been a key focus or orientation for the buyer.

The primary reason for the continued dominance of Recurring Revenue as the preferred methodology is one of contractual convenience, monitoring and risk assessment. When a business is acquired the ownership and decision making in regards to expenses transfers to the purchaser. The vendor does not have management control and there will not be individual P&L’s to track the previous business performance from the merged entity. All transactions have a deferred consideration that reflects performance for a nominated period/s post first settlement.

The one area the vendor can control is Recurring Revenue as this is directly influenced by client retention. Both vendors and purchasers seek client retention and it is for this reason that Recurring Revenue is the dominant methodology used for determining actual deferred considerations.

However AEBIT is a very significant consideration in what Recurring Revenue multiple is applied. A business that enjoys high profit to Gross Revenue will be awarded a higher Recurring Revenue multiple, a business that does not enjoy high profits will be awarded a lower multiple.

Forte has found that both methodologies are used by a prospective buyer and the lower assessment will drag the other methodologies multiple down.

An example may best illustrate this point –

Scenario Gross Revenue Recurring Revenue AEBIT Rec. Rev. Value 3X AEBIT Value 6X Likely Outcome
A $500k $400k $100k $1.2m $600k $1M
B $500k $400k $200k $1.2m $1.2m $1.2M
C $600k $400k $300k $1.2m $1.8M $1.32

Scenario A: The outcome of $1m reflects the high demand for FUM and the Purchaser will look to synergy benefits via lower costs (rent, staff savings). The debt servicing will be approximately $100k therefore synergies are critical for free cash flow. The low profit reduces the multiple down to 2.5 times.

Scenario B: Price convergence of the two methodologies and free cash flow before synergy benefits. Note AEBIT 40% to Gross.

Scenario C: On a Recurring Revenue basis $1.8m AEBIT valuation equates to 4.5 times. The Purchaser will see this as out of step with the market and will offer around a 3.3 times Recurring Revenue with potentially a higher salary for the retained vendor.

The above table illustrates the interconnectivity of the two methodologies and the message to business owners is run your business at above 35% AEBIT to Gross Revenue to maintain future value.

The table also illustrates that businesses are not currently being rewarded for higher profitability as they are being dragged down by Recurring Revenue, this is illogical and the market will at some stage change from its current position.

Given FOFA’s impact to Volume Overrides and increased compliance costs, aggregation or synergies benefits are reducing and it is likely that AEBIT or capitalisation of profit valuations will increase in acceptance.

Given FOFA’s impact to Volume Overrides and increased compliance costs, aggregation or synergies benefits are reducing and it is likely that AEBIT or capitalisation of profit valuations will increase in acceptance.


The 12 month experience to the 30th of June 2013 has witnessed the greatest spread of ranges with the largest number of variables impacting valuation attribution. The primary variables influencing pricing have been, in no specific order –

  • Client service segmentation, specifically engaged or active clients vs non active.
  • Platform – in house or mainstream and the ease of movement of FUM to achieve synergy benefits.
  • Investment management philosophy, the use of direct vs managed funds, performance, ability to duplicate or scale Intellectual Property.
  • Product segmentation – risk vs super/investment vs corporate super.

The range experienced over the 12 months to June 30 2013 was from 2.5 times to 3.5 times and the broad historical assumption of 3 times being challenged as we enter the new financial year.

The Future

The uncertainty created by FOFA has certainly been significant in all aspects of our industry and has been a contributor to practice valuation devaluation due to uncertainty of scale benefits and cost.

However we do not expect a mass exodus from the industry or substantial shift in supply and as commented above the shift in supply experienced was due to the deferment of retirement and then executing once there was the recapturing of lost valuations.

I do believe there will be a reduction in the demand for C and D books which has been the domain of the institution for adviser retention and attraction. The institutions have gone quiet and not likely to return to their previous levels of activity. The C and D clients have to be assessed as at risk and with demand diminishing we expect a retraction of valuations closer to 2 times than 3 times. However the next 12 months will be the test on sustainability of revenue.

If your business is sitting still and doing nothing in this environment it means you are going backwards and quickly.

Multiples are indelibly linked to the predictability of client revenue retention, if you are not engaging the client and your relationship is based on automated outputs, generic newsletters and reactive service delivery that client and that proportion of your business must be treated as at risk.

Those that succeed in the future will be those that have built scalable advice platforms and enjoy a high level of client engagement where value is not questioned.

The hope that Forte has for the industry is that we have better advice businesses, able to engage as trusted professionals to positively change the life of all Australians. This hope is still aspirational but the platform is set and many are well positioned to deliver.


I’m often asked by advisers, how they can improve their businesses to maximise their value, prior to going to market. After a decade of selling advice businesses, I know what buyers are looking for, and what you can do to increase your asset value.

What I don’t do, is help advisers to do that. Rather, I’ll refer people to specialist coaches who have hands-on experience with advice businesses, who know how to help them evolve. In my view, one the best providers in Australia are the team at Elixir Consulting.

On the 14th of August at 12 midday, I’ll be teaming up with Sue Viskovic from Elixir, to deliver a complimentary webinar to share our insights into ‘What does FOFA mean for business valuations and what you can do to improve yours’ as well as answer any questions evoked from the above commentary.

Most importantly, we will share with you, some tips about things you can do to improve your business – for your current enjoyment and income as well as your future asset value.

This will be an interactive session, so numbers are limited. Click this link to register your place

Even if you can’t make the webinar, I thoroughly recommend you subscribe to the Evolve newsletter from Elixir – they regularly share ideas and tips about how to evolve your business.