Practice Valuations: Has anything actually changed?

This is Part 2 of our 5-part blog series on “What is your business really worth?”.

Our ongoing work in the financial advice sector leads us to conclude that there are two main transactions occurring which result in a valuation outcome for financial planning practice.

These are as follows return:

Internal Succession Transaction

This area of the market is often hidden as transactions occur between parties based on a rational view of the valuation between those parties. We are often involved in establishing a valuation for this type of transaction. In nearly every circumstance which is successful our experience is that this valuation will be related to the profitability of the practice. Where profit is the metric the risk profile of the purchaser is easily managed in terms of understanding of payback period and additional remuneration for business ownership.

Generally, if internal succession occurs early enough there are many options to make this transaction viable for all parties. The major problem we see is the exiting individual(s) leaving the planning and execution too late.

Practice Sale Transaction

Practice sales in the marketplace lead to a valuation outcome. In terms of price achieved this price has always been the result of the convergence of the following factors:

  • Quality of the asset for sale
  • Risk appetite of the acquirer
  • Incremental profit to the acquirer
  • Level of scale of the acquirer relative to the purchase
  • Ability to fund

The overarching driver of valuations in this space is the “bolt on the transaction,” buying a business and collocating it with the buyer’s current business, the most common transaction that takes place. This has existed and been unchanged since the inception of the industry. The only real change is the metrics that are achieved.

A simple example of this transaction looks like this:

Recurring Revenue Acquired$500K
Purchase Price Paid @ 2.7x Multiple$1.35M
Incremental Profit after Costs of say 20%$400K
EBIT Valuation Metric for the Acquiring Practice6x
Value to the Acquirer @ 6x Incremental profit$2.4M
Less Purchase Price Paid$1.35M
Business Value Created by Acquiring Practice$1.05M

So what has changed?

Essentially neither of the above transactions have changed in a fundamental sense. We have clearly experienced a demand for services to support them, as well as having been part of the execution of transactions in both areas. Both are still fundamentally built on profit.

The fundamental issue is what is that profit and how has it been affected by the issues facing the industry. More on this in our next blog.

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Centurion Market Makers is a wealth management industry expert providing business broking services to owners of financial planning businesses, and specialist business advisory services to large practices and licensees. If you’re planning on selling your firm in 2021, 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.