LAKE OSWEGO, Ore. -- FP Transitions closed 104 deals in 2013, revealing a continued trend of strong demand and stable valuations, with variations in value connected to transaction type and deal structure.
For all sales to external buyers, the average multiple observed in 2013 was 2.36 times trailing twelve months’ recurring revenue (T12), up marginally from the 2012 multiple of 2.35. When open market transactions were separated from private party sales, however, a gap in value appeared. Open market sales—those transactions where the seller engages in a national search for the most qualified buyer—saw an average of 2.41 times revenue, while private transactions—those businesses sold to a peer without a wider search—saw an average multiple of 2.30.
“We have always told advisors that the value of their business cannot be disconnected from the terms of the transaction; this data supports that value is impacted by the manner in which it is sold as well. On average, sellers taking advantage of a robust open market sell for a higher multiple,” noted Brad Bueermann, CEO of FP Transitions.
FP Transitions attributes the spread in multiples to demand: open market transactions benefit from the higher number of potential buyers for a practice. Advisors who publicly listed their practices for sale on FPTransitions.com received an average of 50 inquiries within the first two weeks. Smaller practices, and those located in metropolitan regions and high demand areas, received significantly more sustained interest.
The efficiency of the transactions process remained stable with most deals entering escrow within 80 days of the initial listing, consistent with 2012.
Deal structure in 2013 saw most buyers paying an average of about 33% down at closing, also consistent with 2012. The balance of the purchase price was typically financed with a promissory or adjustable note carried by the seller.
“We’ve seen a promising increase in the availability of outside financing, either from the broker-dealer or through bank channels, but seller financing remains the predominate source of funds. I don’t think we’ll ever see seller financing go away,” explained Todd Fulks, JD, FP Transitions’ Senior Vice President. “It’s the buyer’s way of ensuring the seller assists in transitioning client relationships and stays involved post-closing. The use of an adjustable note is also an important part of sharing the risk in the deal.”
Private transactions showed other variations in addition to transaction multiples. The parties in a private deal were more likely to use a less sophisticated but more complicated deal structure than open market transactions where outside consulting was used. These arrangements can carry a variety of unintended consequences, from licensing requirements, continued liability, and having the entire practice value taxed to the seller at ordinary income tax rates.
“We attribute this to the parties negotiating for months or even years before hiring an expert to help,” explained Mr. Fulks. “By the time they consult with us, the seller is already semi-retired and may not have a lot of negotiating leverage, especially when the transaction started on a one-on-one basis, rather than an open market listing in which an average of 50 buyers are looking at acquiring. When we are involved sooner, we are better positioned to craft a deal that is fair to both parties and in a much shorter timeframe, if warranted.”
More information about open market transactions will be presented March 7th in the Equity Management System’s First Friday presentation “2013: The Year in Review.” Log on to FPTransitions.com to watch the archived webinar in your EMS member’s resources.
About FP Transitions
FP Transitions is the leader in practice management and succession planning for the financial services industry, and has developed the Equity Management System to deliver the guidance and information advisors need to manage their largest personal asset—their business. FP Transitions founded the open market for buying and selling financial practices in 1999, and has completed more financial service transactions than any investment bank or business brokerage in the country. The firm creates consulting resources for investment advisors, insurance professionals and financial institutions. FP Transitions has completed more than 5,000 valuations of independent financial advisory practices and businesses to date.