Sometimes sellers either have unrealistic expectations of what their practice is worth, or are clearly asking potential acquirers for too much money when it comes to selling their business.
Clients come to me to discuss a potential purchase and the proposition before them. I’ve seen cases where sellers tout 10 times recurring revenues for a sale. My first questions to a client in such a case are: what are you going to make out of this and where’s the real profit in it for you?
There is a process to work through in establishing the answers to these questions. Firstly, lock down what you think the future revenues are going to be, then determine what it will cost you to generate those revenues. In these steps, there is a lot of work in analysing the seller’s clients, the services provided to them and forecasting future revenue streams. There is just as much work on the other side of the profit/loss statement to determine what it’s really going to cost you to drive the business to generate those revenues.
When you go through that process, the outcome is what we call future maintainable profits or future maintainable EBIT. This paints a much more realistic picture of what a practice is worth. When I say to a client, “you should be valuing this potential purchase at 3 or 4 times that profit” sometimes they are surprised because the seller is spruiking their practice for 5 or 10 times that profit.
In my world, a good financial planning practice should be trading on a multiple of between 3 to 4, and that’s after adequate remuneration has been allowed for the principals that are working in the practice.
