Valuating an advisory firm can be approached in several ways, but which is best in 2014? Nicola Brittain finds out…
Advisory business owners might want their company valued for a number of reasons: they could be looking to sell for an immediate exit or are beginning to plan for a longer term exit strategy.
In the case of divorce, a husband or wife with a stake in a business may need to provide half their assets to their erstwhile spouse.
For Brian Spence, managing partner for Harrison Spence, an IFA consulting firm, more than 50% of his company's enquiries are from people planning a long-term exit strategy and wanting to ensure their business is in good shape for themselves and the remaining partners before they leave.
He argues that, traditionally, adviser firms have been lifestyle businesses with no profit and just one or two advisers. These businesses have tended to be valued on three times annual earnings (including recurring revenue).
Spence argues that there continues to be a lot of untapped value in lifestyle companies where clients have not yet been moved across to a recurring model.
"In the past, a client may have paid a one-off fee to an adviser to put money into a bond, for example, but the adviser does not yet charge them an ongoing management fee for their services. Once clients like these are moved, the value of the business can be increased substantially," he says.
Spence says that the more commercially savvy advisory firms have tended to adopt an EBITDA (earnings before income, tax, debt and amortisation) approach to valuation.
Companies that are valued in this way tend to be bigger, with a more corporate structure that might include a managing director responsible for company direction rather than advice.
In addition, advisers looking to maximise the value of their business should ensure it is structured so as to benefit from entrepreneur's relief, according to Spence. This will make the difference between paying 38% and 10% in tax following a sale.
A business owner should seek help from a consultant when remodelling the business with this in mind.
In addition, advisers should be aware that the three times recurring income valuation model may not include all of a company's assets. IFA sales and mergers managing director Phil Totty says that, over the last two quarters, acquirers are increasingly reluctant to consider trail commission in a valuation because they believe it is likely to be switched off.
Similarly, they are reluctant to take on low net worth clients (with value of under £50k) and may, therefore, discount these clients from a valuation too.
He also explains that the sort of companies looking for valuations has altered, with many slightly bigger companies (of ten advisers or more, up from smaller companies of five advisers) seeking valuation with a view to sell or merge.
"Companies of this size seem to have been feeling a profit squeeze recently," he says.
Partner and head of valuations at BDO, David Mitchell, argues that companies should make use of several valuation methods and that, in addition to EBTIDA and recurring income, a multiple of turnover should be considered. Mitchell says this would show up actual cashflow generation and highlight any excessive investment costs. He explains that using several valuations would ensure nothing was overlooked in a company's valuation.
There are several less easily quantifiable ways in which businesses hold value, he says.
A thorough valuation should look at the way a business handles client relationships and whether they are managed by a single individual or spread across several.
Second, clients that come via referral are more valuable because they will tend to be more loyal. Third, a company that is heavily reliant on a small number of high net worth clients will be less valuable than one with a wider client base.
Increasing the value of your business
IFA Sales and Mergers managing director Phil Totty highlights four ways in which a business owner can increase the value of their business:
1) Switch all clients to individual client agreements, where they are serviced on an ongoing basis.
2) Make sure clients are aware of what they are paying for. This will increase customer loyalty in the event of a company changing hands.
3) A client bank should be segmented into low and high net worth clients, making the real value of the company (with many acquirers perceiving this to be with high net worth individuals) clear.
4) The back-office system should be up to date and easy to integrate with a new system, making any transfer following a sale straightforward.
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