Determining the value of your financial advisory practice is a complex undertaking. However, whether due to retirement or death, everyone eventually exits the industry, which makes business valuations both a wise investment and a crucial step in ensuring your own financial well-being, as well as that of your clients.
From the desire for autonomy and the allure of being one’s own boss to the ability to offer clients a diverse range of financial products, several reasons prompt brokers to become independent financial advisors (IFAs).
Yet, few start their own financial advisory practices with the intention of selling it one day. Many financial service provider (FSP) owners don’t think of their businesses as potential assets for sale or transfer upon retirement. Or those intending to sell often delay this consideration to the eleventh hour, lacking a clear understanding of their business’s true value.
This is where business valuations play a pivotal role. Not only does it provide FSP owners with a tangible price tag for their businesses, but it also identifies critical gaps in the business that, when addressed, can enhance the business’s overall value.
Unlocking true worth: The importance of business valuation
Evaluating the value of your financial advisory practice is essential for several reasons. Firstly, it provides a concrete monetary value for your business that can serve as a benchmark of its true worth.
Furthermore, it establishes realistic expectations. While you might estimate your business’s worth based on its income, underlying issues in your practices or the absence of crucial processes can lead to a significant disparity between your perceived value and the actual value. A proper business valuation will bring to light these issues, giving you the opportunity to rectify them, thus increasing your business’s value before a planned sale.
Having a grasp of the real value of your business is particularly important if selling it is part of your retirement plan. It ensures that your plan is based on your business’s true value, not the amount you think it’s worth. Moreover, you shouldn’t leave a business valuation to the last minute. If you want to boost your business’s value to help fund your retirement, you’ll need to conduct a valuation five to seven years before you plan on stepping down. This gives you enough time to address gaps identified by the assessment to enhance the value of your business.
In addition, buyers will want to do their due diligence to identify exactly what they’re buying, and a formal business valuation will facilitate this process. (However, it should be noted that the ultimate sale price will be based on what a willing buyer is prepared to pay for the business.)
Finally, a valuation provides FSP owners with a comprehensive understanding of their entire business, their client base and core values. This is vital for decision-making, particularly in selecting a suitable replacement Key Individual. Knowing the business value empowers the owner to decide what the best course of action would be for them, their clients and staff – transferring, selling for profit or passing the business on to family.
Beyond earnings: Masthead’s comprehensive approach
There is a prevailing industry misconception that business value is simply determined by multiplying earnings. However, the process is far more complicated than that.
A proper valuation should include a nuanced assessment of income streams and future commissions. For example, are the FSP’s clients older or younger; are there any annuities that will soon mature; has the FSP drafted wills and what is the value of the estates?
Furthermore, it should go beyond quantitative metrics and should also include a thorough evaluation of qualitative factors that can influence the worth and robustness of the business, for example, client retention and customer satisfaction.
In addition, it should review the level of risk in a business or the quality of risk management. This relates to compliance with the relevant legislation and the implementation of processes that monitor business performance and decrease risk. It also relates to business brand and reputation.
Masthead’s approach to business valuations evaluates both the business’s quantitative and qualitative factors. In practice, this means that we first require an FSP to provide us with a detailed list of all their income streams.
Afterwards, a practice management consultant will visit the FSP to evaluate the health of the business. This involves looking at aspects like practice management, overall management, whether good business practices and a Treating Customers Fairly (TCF) approach are in place, your staff’s grasp of your business’s strategic goals, your strategic planning, and so forth.
Following the assessment, the consultant will provide guidance and suggest changes aimed at enhancing the business’s capital value. This could involve improvements in client retention or segmentation, a marketing strategy, the implementation of rigorous compliance procedures or enhancements in staff management.
Looking after your staff and clients when you’re gone
Many FSP owners are often so engrossed in day-to-day operations that they don’t plan for the inevitable – leaving the industry. Whether it’s pursuing a new career, retirement, death or unforeseen circumstances, everyone will eventually exit.
In this regard, a business valuation serves dual purposes: not only does it help secure the best price when you decide to sell your business, but it also lays the groundwork for a smooth transition.
A thorough business valuation pinpoints potential challenges during a transition, and addressing these issues proactively ensures the well-being of your clients, which relates to the TCF principles, as well as your staff, making certain that they are taken care of beyond your departure.
Do you need help with your business valuation?
It is never too early to begin building capital value and creating a succession plan. To request a valuation and find out what your business is worth, please contact us.