SJP Valuing your Practice or advice Business
The last few years have provided challenges to everybody across the Financial Advice space in Asia which it's important to take a step back in the year and look at the asset you are building.
One of the most difficult aspects of any financial Practice sale is reaching an appropriate valuation. Often, buyers and sellers go into negotiations with values in mind. However, the case for a specific value is always stronger if that value is based on a proven methodology. Many well-established methods for valuing an advisory Practice exist, but they all involve some degree of complexity and subjectivity.
There's no valuation method that is 100 percent accurate. One can come up with a reasonable range of values, though. A Practice valuation is an important resource to have, but, ultimately, negotiations between the buyer and seller are what determine the price and structure of the deal. In this guide, we look at some of the factors which will impact the value of your Practice and key areas which can increase or decrease the value.
Financial Planning or Wealth Management Practices are valued according to one of two methods. The most common method is to apply a multiple to the recurring income of the business. The other is to apply a multiple to earnings before interest and tax (EBIT).
Key factor for valuation: Assets Under Management
For Financial Advisory firms, your greatest asset is your client list - YOUR “book of business”. Look at all of your clients, including their names, assets invested, type of investment and whom they are invested with. If there is more than one advisor in your Practice, note which adviser is responsible for each relationship.
All of these assets are then added together for all clients to calculate your Practice’s AUM.
Consider your practice model & how you generate revenue
Revenue for fee-based financial planners comes as they develop financial plans for their clients. These plans are generally prepared for an initial fee. After this, the plan can be modified or altered depending on the client’s situation for an additional fee.
Commission-based revenue comes as a percentage of the Assets Under Management (AUM). AUM is the total amount of money that clients have invested with the firm. Generally, the financial adviser charges a percentage fee (either flat or tiered) on the assets being managed for each individual.
Revenue obtained through selling insurance products and other such services. This could make up a significant percentage of your income as you have multiple products and solutions with each client, outside of their investments.
Recurring revenue is exceptionally valuable to a financial adviser because it is revenue occurring each year. It is not a one-time fee, therefore making this business model quite attractive and lucrative for an eventual sale.
Key considerations which can increase or decrease the value of your practice
| Increase Practice Value | Decrease Practice Value |
|---|---|
| Historic and current financials are all in order | Financials are not in order |
| Recurring revenue | Transactional Revenue (i.e. flat advice fees) |
| Operating profit | Average client age - clients over age 70 have depleting assets that impact value |
| % of High Net Worth Clients | Large number of low value clients/small accounts that don’t align with current business model |
| Growing assets: rate of increase in AUM or contributions | Shrinking Assets: rate of decrease in AUM or contributions |
| Strong systems and controls e.g. availability of management information and consolidated, strength of Compliance, strong IT infrastructure and CRM system | Poor systems and controls e.g., troubled investment funds, ongoing complaint cases, dealing with clients on different basis, no CRM system or processes are informal |
| Strong internal management, advisory and support team in place | Lack of next generation relationships |
| Database is segmented and well organised in an electronic format |
Valuing your practice in terms of multiples
This ‘rule-of-thumb’ valuation method is based on comparing the quality of your Practice with that of similar businesses.
There are two popular methods in this approach:
Multiples of revenue
Recurrent income is the amount of income received by the business in the previous 12 months which is of a recurring nature, which is multiplied by an appropriate number.
This includes asset commission, life insurance servicing commissions and recurring fees for service. Recurrent income excludes fees or commissions received for once only events.
Multiples of cashflow
This allows the valuation to account for expenses rather than just revenue. It’s often calculated using EBIT (earnings before interest and tax). When purchasing, care must be taken when you look at the profit and loss statement provided by a business owner.
It is common for small Practices to include private or non-commercial expenses in the business. Under this model, it’s important for the seller to ensure historic and current financial statements are all in order.
Are you building an asset for someone else?
Are you looking for a new challenge and are highly motivated to build and grow your own successful business?
Are you a practised or practising adviser with more than 3 years of experience and are a proven business networker?
Do you have a strong drive to provide an exceptional client experience and have exemplary advice related skills?
At St. James’s Place, we often see many advisers who are working hard building someone else’s business, often a bank, rather than building an asset for themselves. We have a range of support services, infrastructure and backing from a listed company to ensure that we provide an environment for successful advisers.
Most importantly, our Partners and advisers own their own clients!
If you wanted to learn more about our Business Sale and Purchase program or learn why many advisers across Asia are joining St. James’s Place, fill in the form below.
We would be more than happy to talk through the dedicated support we can offer your Advice business.