FP Transitions Announces Practice Values Continue to Increase Based on Strong Demand
Portland, OR - February 12, 2013. FP Transitions reported today that it closed over $60 million in total practice sales to third-party/external buyers in 2012, a 125% increase in closing activity over the same period last year (FP Transitions reports internal sales or transitions separately). In addition to the increase in the number of practice sales, the average selling price of practices sold in 2012 also increased to $640,000. Buyer activity was again strong in 2012 with an average of 50 inquiries per listed practice, generating an average of 2.4 offers per practice listed and sold. Average time on the market for practices in 2012 was a brief 80 days (from listing to closing).
Recent buying and selling activity has closely tracked valuation results for the firms. FP Transitions completed over 1,000 practice valuations in 2012 with actual selling prices falling within +/- 3% of the FP Transitions’ estimated value of the practice. Erik Pahlow, Valuations Director at FP Transitions, attributes the accuracy of the valuation and selling process to a reliance on a growing data base of comparable deals. “The FP Transitions’ data base gives us the ability to make continuous adjustments to our valuation system in order to reflect current market conditions.” The FP Transitions Comprehensive Valuation is a 60 page report using a valuation methodology designed specifically for the financial services industry, analyzing the key value components of transition risk, cash flow durability, and marketplace demand to determine an appropriate open market value tied to actual deal terms.
Seller financing in third-party transactions remained the norm in 2012 with over 95% of completed transactions financed by the seller. Deal terms for recent transactions saw an increase in the cash down payment component as well as a reduced payout or financing period. Average down payments for third-party transactions in 2012 were 34% of the purchase price. Overall financing terms held steady at an average of 4.8 years.
“The slow but steady increase in practice value over the years is notable,” says Brad Bueermann, Managing Partner at FP Transitions. “We have been observing a shift from ‘job-based’ practices which are selling their client book based primarily on revenue strength alone, to practices and businesses which have built enduring and transferable business models. These businesses generate enterprise value as measured by the strength of their infrastructure (which includes staff, entity and organizational structure, competitive compensation systems, and efficiently managed client services). Our thinking is that the trend toward fee-based services has necessitated the building of stronger and more sophisticated businesses to support the required client service level. The reward,” Bueermann noted, “is that the average value reflects a multiple of trailing 12 months revenue that is up by more than 8% in the past twelve months to 2.35 (times trailing 12 months recurring revenue). Buyers in turn appear to be attracted to the stable cash flow and low transition risk that these high enterprise level businesses represent, and the recent and consistent 50 to 1 buyer to seller ratio supports this view. “
Todd Fulks JD, head of transactions at FP Transitions also reported an increase in deals structured as Sell & Stay™ or GlidePath™ models. These unique transaction structures, designed and administered by FP Transitions, facilitate a transition in which the founder sells a controlling interest in the business to a successor but remains on as an employee for three to five years while gradually reducing his/her hours worked toward an on-the-job retirement. Mr. Fulks explains, “This strategy provides for a more gradual transaction than the typical model of selling a business and fully retiring, allowing an adviser to realize the value of their practice while still continuing to work, albeit at a reduced level. In addition to being a great transition for the clients, this approach also supports an end of career continuity protection strategy for the older advisor.”
FP Transitions is recapping recent market activity in an upcoming webinar on March 1, 2013, at 9:00 am PT/10:00 am MT/11:00 am CST/12:00 noon EST. Register here.
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 4,000 valuations and more than 1,500 customized 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.