We have had plenty of queries over the last 2-3 months regarding what Covid19 is doing to your business valuation or prospective sale – a reasonable question, give such an uncertain time.
We talk to financial planners every day of the week, about how they’ve gone through this time. Those with fixed fees have not been financially impacted in the short term. New business, and seeing new clients, slowed initially. Advisers are reporting that new clients postponed appointments and they are less enthusiastic about meeting new clients via Zoom as it feels less personal and may not lead to strong client relationships. Other businesses, with fees linked to market performance have noticed a short-term decrease in income, this coupled with grandfathering income beginning to be cut some advisers are hurting. Most advisers report there has never been a better time for client relationships, they need you now more than ever before.
Covid19 in Australia has been managed, at this stage, quickly and efficiently compared to other, usually comparable, countries. With this, still comes the fear of a second wave, uncertainty about how we get back to normality. Seeing the impacts beamed from across the world increase anxiety and uncertainty around our future. Let’s look at how Covid19 impacts business valuations and prospective sales.
Covid19 & Your Business Valuation
We value most businesses on a Future Maintainable Earnings Valuation Methodology. This means we review your profit and normalise your income and expenses, before applying a business capitalisation rate to the future maintainable earnings (profit), let’s look at the inputs:
Future Maintainable Earnings
- Review your profit and loss statement, and balance sheet
- Adjust your profit and loss:
- Is there a one-off income?
- Is there non-operational income items, e.g. interest, profit on the sale of assets?
- Is there any income that is ceasing, e.g. grandfathered commissions?
- Expenses that are one-off (legal costs, one-off investments)?
- Expenses that are non-operational, but tax effective in your business – e.g. motor vehicle costs?
- Normalising your salaries for yourself, and related parties
It is common in small businesses to pay yourself in a tax-effective manner, e.g. via dividends, income splitting for other work completed in your business (e.g. bookkeeping), etc.
We look at industry data and enquire about your role to determine this.
- Consider if this profit is viable and replicable in future years
Business Capitalisation Rate
- This considers internal and external factors that impact the quality and future of your business.
- For financial planning firms, this is generally 4-6 x, with higher quality practices being towards the higher end.
- Covid19 is an external factor that could impact the capitalisation rate, however financial planning practices aren’t generally impacted too significantly by the pandemic, to date.
Long term impacts on valuation
We don’t believe there will be a long-term impact to your business valuation, unless your income and therefore future profitability, has been negatively impacted by Covid19. This could be not writing new business and long delays with this. If you do not return to the ‘normal’ new business levels within 6 – 12 months or so, this could leave a longer-term impact.
Whilst most believe businesses are sold on a recurring revenue basis, and that new income is irrelevant, most new income is converted to some level of recurring revenue in the second year. This both builds recurring revenue and replaces client drop off.
We have seen some great adjustments to businesses over this time, and some advisers finding technology usage is making them more efficient, with new and old clients – this may lead to an improvement in valuations over time, e.g. by reducing travel time to clients they can squeeze more in to their day – it’s not all negative!
Covid19 & Your Business Sale
We have had multiple enquiries regarding business sales in the last few months, along with interested buyers still contacting us. The market hasn’t stopped. We believe that quality practices are still holding their value. Quality practices, defined simply, have good systems, processes and average client fees in the vicinity of $3,000 plus per year. This has been the case for some time, the market has been impacted over the last few years with the Royal Commission, FOFA, FASEA and general public scrutiny.
These changes have made the market more discerning, it’s flooded with small advisers with small books, and low client fees, wanting to exit and not complete further study – buyers can pick these books up cheaply, but the costs to service and embed are large – and they’re not their ideal clients – they’re not attractive. The market is looking for client bases that have ideal clients – those on consistent platforms, with advice-based fees, with an ability to transfer relationships.
Financial planning businesses have been impacted for a short timeframe as they react to the market drops and reassure clients – but we haven’t found any other impact in their responsiveness or ability to transact. This is great news for those with planned sales or beginning to plan their sales process. Quality practices are quality practices, pre and post Covid19.
Essentially, the future is still uncertain, but we believe financial services businesses have come through as well as possible. Strong client relationships, fixed fees that have been discussed and are value based, and the ability to adapt and continue working/servicing clients – even from home, put the industry in good stead.
Have a look at the latest edition of our Practice Valuation Guide for more information.
Fiona Ettles is a Chartered Accountant who joined the Centurion team in 2017. She specialises in Business Valuation work and Financial Planning practice sale and succession advice. She has extensive experience in valuing businesses, succession strategies, and business sales.
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