Prices of financial services businesses are likely to increase throughout 2012 as confidence returns to the market and sellers continue to defer their sales following a significant decrease in the past six months.
The future of financial advice (FOFA) reforms are expected to provide some clarity to the market, which in turn will help to improve buyer demand, Forte Asset Solutions director Steve Prendeville told InvestorDaily.
However demand is expected to experience an about turn and start to outweigh supply as sellers remain reluctant.
“There are significantly more buyers than sellers and this is because a number of principals are deferring their retirement and they’re deferring because their recurring revenues are still 20 per cent below [that of] 2008,” Prendeville said.
“Superannuation balances have been impacted as well so if health allows, they’re deferring their sales, which is creating a scarcity factor which is also going to buoy prices up through 2012.”
However since November last year, financial stress following the global financial crisis (GFC) has continued to cause a spike in the number of financial advice business and client books bought or sold.
“[As] we saw [it], the six month average multiple was 2.88 which is the lowest in nine years that I have seen. That was purely because of FOFA uncertainty,” Prendeville said.
“FOFA did impact demand but not supply. The reason that people were selling was predominantly for financial stress. That is still the case today. But there is no mass exodus because of FOFA concerns.”
Further clarity around FOFA is expected to start bringing more confidence and more buyers to the market, he said.
“For larger businesses there is a greater risk precedence over them as to what they are going to be in a FOFA regime. However, in mid-November, when tranche two came out, there was actually a return of confidence and we came back to a normal trading period,” he said.
“But for the six months, there was a 12 per cent fall. The average business fell in value by $144,000.”
