What your practice is worth
How a buyer values the ongoing advice fees of your firm, and what reduces that value.
How a buyer values the ongoing advice fees of your firm, and what reduces that value.
A sale price is often described as a multiple of income. The multiple is a result of the valuation. A buyer cannot quote one before seeing your clients and your income.
A buyer estimates how much of your ongoing advice revenue will still be arriving three years after you leave, and what that certainty is worth. File quality, client age profile, concentration and owner dependency all feed into that estimate.
Split your income into three groups, and be strict about which group each fee belongs in.
This group carries most of the value. These fees are recurring, contractual and paid by clients who are being serviced.
Fees on clients in drawdown who will have spent the pot in eight years. Fees on legacy products you do not advise on any more. Fees on households where the adviser relationship is dormant. This is income today, and a buyer values it at a lower multiple.
This income leaves with the person who generated it. A buyer will pay little for it.
Reviewing clients in the second group and putting them on a regular service moves their fees into the first group.
The share of clients with a documented review inside the last twelve months, suitability reasoning that stands up without you in the room, and a service agreement the client has seen and signed. This is the adjustment that moves a valuation most, and the slowest to fix, so it has to start years before a sale.
A client base entirely in drawdown is a different asset from one with clients still saving and a younger generation behind them. Older clients can be more profitable today. A buyer is looking at the assets in ten years, and if the average client is 78, much of that money will have been drawn down by then.
What share of your recurring income sits with your ten largest households? If it is above a third, a buyer will allow in the price for the possibility that two of them leave. Find out the number even if you never sell, because it is also a business risk you are carrying now.
If you stopped on Monday, how many of your clients would still be with the firm in a year? The clients who come to mind first are the ones you speak to most, so count the whole list.
Whether your data is in one system and could be handed over cleanly. Whether the ongoing service you promise is the one you deliver. Whether anything in the past will surface in due diligence, and whether you have raised it yourself first.
Our valuation tool runs the same calculation: ongoing advice revenue carries the value, initial income counts for a fraction of it, and the five adjustments are applied on top.
Treat the answer as a range. A single figure before due diligence can only be an estimate.
Four of those five adjustments improve with work that takes one to three years. A sale is agreed in weeks, so in a conventional sale the price reflects the state of the business when the principal decided to sell.
Under a staged arrangement the terms are set at the start and the improvement happens while you are still running the business, so the conversation has to start years before you intend to stop.
Under Securo the commitment is specific: Equity & General acquires the assets under management at no less than market value at the point you retire, on a floor agreed in writing before you join. The structure, including the timing and how much is paid up front or deferred, is agreed firm by firm, because forty households and four hundred households need different terms.
The order in which to bring client files up to date in the eighteen months before a sale.
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The documents and records a buyer asks for, and how to have them ready before the request arrives.
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Under Consumer Duty, a firm has to show what each client’s ongoing fee pays for.
Read itSteven Bates, Director of Advisory at Equity & General, takes the first call with every adviser. Ring him on 020 8396 0486 or send a short note about your firm.