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Succession Planning

Assessing Value

How do you know if the business you work for is worth owning? Maybe the current owner of the firm you work for has started talking about succession. Or maybe you are considering leaving the firm you’re at and starting your own business. An acquisition could help you skip of few stages of growth.

We believe that there are three key things you must consider when valuing an IFA.

Firstly, we look at financial advice firms in the broadest sense. At the time of writing there are now over thirty private equity funded consolidators, buying up financial advice businesses in the UK. There are an increasing number of lenders willing to provide capital to these firms too. Why is that? Why do investors and debt providers now like this type of firm? In simple terms, these businesses can produce high levels of recurring revenue (in proportion to total revenue) and do so consistently for many years. Once clients establish a trusting relationship, they’ve made a huge decision and don’t often change their mind. One of the most important elements to consider, therefore, is recurring revenue.

Secondly, another positive consideration is that financial advice firms are pretty resilient in the face of macro-economic volatility.  Clients with good financial advisers rarely withdraw their money, preferring to stay the course and remain invested over the long term.  Furthermore, fees paid to a financial adviser rarely show up on a bank statement, as they are generally taken from the fund or platform. In short, a client’s relationship with a financial adviser is unique and doesn’t feel like an expense, in the same way an accountant or lawyer might. When assessing an IFA’s value, it is important to weight fees appropriately, in the context of the clients’ perspective.

Thirdly, not all firms are created equal, and there are different types of financial advice firm.  These differences often play a key part when it comes to valuation. Firms focused on the provision of lifestyle financial planning seem to experience the highest levels of client retention. They are also more likely to be managing the entire portfolio, as they focus on their client’s whole life, mapping out financial strategies that apply to all their money. Many of these firms have an investment philosophy that focusses on asset allocation and the use of index-based solutions. It seems that clients respond positively to this and don’t feel the need to give ‘mandates’ to several advisers, preferring to let the financial planner look after all of their wealth, in line with their financial plan. These firms are more successful when it comes to engaging the next generation of clients, working as they do with entire families, instead of just one individual in a family.

In summary, whichever way you want to determine value, you should keep some key metrics in mind. In terms of clients, the number of them, the average portfolio size and the average fee charged each year as a percentage of the portfolio are all important. On the team, the number of advisers, their service periods, ratio of support staff, number of clients per adviser and capacity are all useful. And on the performance numbers, annually recurring revenue, operating profit and total assets under management will all be significant. If you are trying to do a valuation, try to get these for at least three years, so you can see what the trend has been. You’ll also want to look at the age profile of clients, what investments they have and the firm’s compliance record. Keep in mind that these are just some useful pointers and that it’s always a good idea to get professional help. When it comes to a specific firm, there are many ways to value a business. You can read more about that in our various guides on the resources part of our website or read our blog about valuations.

It’s useful to look at a business through these three lenses. If they are all positive, you could be on to a good thing. If one or more is negative, then that is generally a signpost that more research is needed before a final decision is taken. All food for thought.