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Forward Thinking Magazine : August 2011
17 But if the vendor is unwell, or if the sale of the practice is forced for some reason, the purchaser may be able to negotiate a lower multiple if they accept little to no clawback on revenue conversion. In addition, if the business is already operating on a fee-for-service model or the platform's fee structure is consistent with the acquirer's, and hence easier to integrate, it is likely to be sold on a higher multiple. Conversely, if the vendor negotiates special conditions, i.e. an ongoing tenancy in the same premises (perhaps because they're owned by the vendor), a salaried employment for the principal and/or key staff, then the multiple is likely to be lower. "The price paid is not just based on the value of the practice, it's also based on the context of the sale," says Winton. Under the second scenario, the business is sold on a multiple of future maintainable earnings, based on earnings before interest, taxes, depreciation, and amortisation (EBITDA) adjusted for the cost of the principals' salaries. Winton says determining the price is about "the certainty of future maintainable earnings, as well as the composition of revenue -- how much of the revenue is negotiated fees and how much is commission-based. If the business is largely commission-based there is a perceived risk to future earnings and we see acquirers being more conservative in their valuations. The rule is, the more confident the acquirer is about the sustainability of future earnings, the higher the multiple will be." Managing the implementation process The key message when it comes to managing implementation of the proposed reforms is the earlier the business starts getting ready, the better. "Moving to a fee-for-service environment can't be done overnight. You need to plan ahead for how this important initiative will impact your business and engage support to help you manage the process if you need to. How you manage the change will very much depend on the nature of your business and its client base," says Winton. "There is still flexibility around the way advisers can charge for their services, ultimately it's the way that the fee is collected that will change. The important thing to think about is how you will negotiate this change with clients. Will you charge a fixed fee and debit this from your clients' accounts once a month? Will you charge a fee based on a percentage of assets under management? It's important to think about this because the way you collect the fee will in part determine how much it will cost the practice to switch to the new regulatory regime," she says. In summary Mackenzie adds: "Changes such as the ones FOFA will herald are often a challenge to negotiate. But these initiatives are also a real opportunity for advisory practices to have a proactive approach and take the opportunity to refine their value proposition and cement client relationships. In a post- FOFA world, advisers need to consider how they can develop multiple touch points with clients and multiple revenue streams to support the business's earnings and the value of the practice. Those that do this will stand apart from the crowd and place themselves in a strong position to improve and grow their practices. It's a once-in- a-lifetime opportunity for advisers that cannot be ignored." Growth strategies