How to understand the value of your advice firm

In a blog aimed at preparing business owners for valuation, Centurion Market Makers founder and chief executive Chris Wrightson said many firm owners are unaware of the market value of their businesses.

“More than 50 per cent of practice owners tell us that they do not know what their practice is really worth. Identifying what your business is really worth is an essential part of preparation for a sale, merger or succession plan,” he said.

According to Wrightson, there are three key areas that you need to assess to understand the market value of your business and demonstrate that to a potential buyer.

The first is business financials, such as client-paid ongoing adviser service fees, life risk upfront and trail commission, mortgage or debt product upfront and trail commission, and new client revenue.

He added that client data needs to be collected and organised to highlight the costs and benefits associated with the client base.

“You need to provide detail on a per client basis across a few categories at a minimum. You can group them into bands for the purposes of documenting your IM. These bands can include ages, FUA, recurring revenue/fees, postcode, annual premium in force (or similar), or business model segmentation,” Wrightson said.

Finally, he said understanding the different ways a buyer and seller will calculate the profit margin of a business is crucial as it will impact the perceived value of the business for each party.

“You make a profit margin from delivering financial advice to your clients, others make a margin based on the advice implementation, including platform margin, investment management margins, life risk margins, and debt product margins,” Wrightson said.

“In short, you need to demonstrate to buyers what you do, how you do it, for who and what are the results. The more information the better.”

According to the Centurion Market Makers’ 2024 Advice Practice Acquisition, Sale, and Valuation Guide, the most important factor for a buyer is, unsurprisingly, profit. The more profit they will make, the higher the price they will likely pay.

“The majority of the transactions that are completed in the marketplace are the sale of a practice or book of clients by the owner to an acquirer who has an existing practice,” the report said.

“Most often the acquirer already has premises, staff, business systems and infrastructure, so consequently when purchasing another business or client book the acquired business is relocated to the acquirer’s office – the ‘bolt on transaction’.

“For many of these transactions, only part of the purchase price is paid upfront (usually 60–80 per cent) with the balance paid a year or two later and subject to performance clauses.”

This, it said, creates a level of complexity as the businesses become intertwined. It also makes the scale of the purchaser important for the firm that is selling.

“If your business is sub scale, and acquired by another business that is sub scale, the recurring revenue multiple you receive will likely not be at the top end of the range,” the report said.

"Often larger scaled businesses will derive more profit from a bolt on acquisition than a smaller business due to the existence of existing resources and infrastructure.

“The more profitable a business is, the more a purchaser is likely to offer for it – even though the offer might be positioned as a recurring revenue multiple. The bigger the acquirer is the more profit they are likely to make from acquiring a business, the more they are likely to pay.”