More than 50 percent of practice owners tell us that they do not know what their practice is really worth. In a service-lead business with clients moving in and out and products constantly evolving, this is not a surprising predicament, however when a practice owner decides it’s time to sell and move on, knowing the value of your practice is critical.
Identifying what your business is really worth is an essential part of preparation for a sale, merger or succession plan. Inadequate preparation is the first of the three most common mistakes we constantly see when transactions are taking place and it is the number one reason practice owners fail to maximise value, minimise transaction risk and transact in less than six months.
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Many practice owners start by assuming (or hoping) their business is at the top of the range without any real independent assessment to guide them. If we focus on the business and its value there are three areas to prepare business information for any kind of transaction and to assist with accurate valuation:
- Business Financials
- Client data
- Product data
Buyers come in a variety of “shapes and sizes” some will be interested in understanding or seeing your business differently to the way you see it and, in fact, differently to the way other buyers want to see it. You’ll save a lot of time by preparing your business data in a way that the majority of buyers will want to view it. It’s not hard if you know what you need.
In short, you need to demonstrate to buyers what you do, how you do it, for who and what are the results. The more information the better. This typically gets packaged up in an information memorandum. (IM)
So you need to provide data in three core areas:
- New Business Fee Revenue
- Life Risk upfront commission
- Life Risk Trail Commission
- Investment Trail Commission
- Superannuation Trail Commission
- Client paid ongoing Adviser Service Fees
- Corporate Super Plan Trail Commission
- Individual ex Corporate Super Members Trail Commission
- Mortgage or Debt product upfront Commission
- Mortgage or Debt product Trail Commission
- New Client Revenue– How many new clients in the last 2 years, how were they sourced, revenue generated by new clients both initial and ongoing, new FUA and new Life Risk sales from new clients and existing clients. So many businesses we meet do not record there new client acquisitions correctly = lost value
You need to provide detail on a per client basis across a few categories at a minimum. You can group them into bands for the purposes of documenting your IM. These bands can include ages, FUA, recurring revenue/fees, postcode, Annual Premium Inforce (or similar), or business model segmentation.
Product information is like a layer cake. You make a profit margin from delivering financial advice to your clients, others make a margin based on the advice implementation including:
- Platform Margin
- Investment Management Margins
- Life Risk Margins
- Debt product margin
You will need to document the product sets within your client base as it will be required by some if not all the parties you talk to.
The above information along with the financial statements will be required to accurately determine value and most importantly will likely be required by the party you transact with. If you are considering any kind of transaction, sale, succession or merger make sure you do your preparation well and this will make the process easier and valuing the business simpler.
Chris Wrightson. Founder and CEO at Centurion Market Makers, the industry experts in the sale, acquisition and management of financial planning firms. If you’re planning on selling your firm in 2017, we’d love you to call us for a confidential discussion, or continue browsing our website for more tips, tools and info on the steps to take when buying or selling your financial planning firm.
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