Many advisers see their business much like their super – an important part of shoring up one’s financial independence and retirement outcomes.
It’s odd, then, that some business owners don’t treat valuation appropriately. Speaking at the 2018 Financial Planning Association Congress in Sydney, Bstar executive director Scott Monotti said that there were three key drivers of an advice business’s value: owners, clients and growth.
Let’s explore what these three mean in practice, and then discuss the worst mistake an adviser can make when they’re ready to sell.
Owner risk
The first driver is ownership structure. This can be broken down into multiple parts: whether principals are aligned on the future direction of the practice, whether they’re open to external advice and support and the degree to which the business is reliant on its owners – in other words, as Monotti put it, could the principals go on holiday for three months and find the practice still functioning when they return?
Other questions to ask include the willingness of principals to transfer client management to senior staff, whether owners remain motivated to grow the practice, the guidelines in place with respect to principal remuneration and bonuses, and whether there’s a solid culture of work/life balance.
It’s important, Monotti explained, for owners to recognise their place in a succession strategy to ensure the business model is sustainable.
Client risk
Let’s move onto clients. Valuation factors included how much revenue is concentrated in the top five clients, how clients are segmented (life stages and specific needs, service packages etc), the regularity of formal client surveys and principals’ willingness to “sell off” less profitable clients.
Other key factors were the likelihood of clients leaving in the event of a principal’s succession and how a 10% increase in fees might affect retention.
In other words, having a sustainable client base is just as important as how the business is run.
Growth risk
Obviously, the rate of a business’s growth contributes substantially to its valuation. Key things to consider are whether the business is attracting new high-value clients, likelihood of existing clients contributing to growth, strength of referral relationships and client trust across all levels of staff.
Another important growth factor is the provision of specialist services, as this will naturally expand referral capabilities and competitive edge.
So what shouldn’t I do?
Here’s the thing: all of the above factors are crucial to increasing your business’s value, but as Monotti said, “If you agree your business is an asset for your financial future, why would you only value it three months out from pulling the trigger on a sale?”
What he meant was that valuation should be conducted on an ongoing basis so as to identify key challenges to business growth and address them proactively.
If you’re conducting valuation at or close to the point of sale, you may well be missing out on a much better price.
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