Value Your Business
An IFA business, like any other business, is in essence worth as much as anyone is prepared to pay for it. The best way to maximise your value at the point of sale, is to ensure that you have a number of firms who are prepared to pay for your business. This is fundamental to the IFA Marketplace proposition.
IFA Marketplace puts IFA businesses together to allow them to negotiate a price between themselves. Each deal can include a multiple of factors beyond price, including earn out periods, share options, continued employment, profit shares, etc. These will reflect the different motivations of both buyers and sellers. With this in mind it is impossible to give a one size fits all method of valuation.
To assist both sellers and buyers in understanding methods of valuation we have included some generic guidelines below on the most common methods of valuation. This should provide you with a basic framework from which to work.
Multiple of Recurring Income
Typically suits: Purchase of Assets/Goodwill, small businesses selling its renewal stream/book of business.
Typical multiple: Multiples usually vary between 2 and 4 times recurring income (usually the renewal/trail stream) although multiples as low as 1 and as high as 6 are occasionally seen.
Positive influencers on multiples: Properly segmented client bank, large percentage of clients on one platform, quality and wealth of clients, client details well recorded on a reliable database, consistent charging structure, low reliance on initial commissions, high persistency rate, low percentage of mortgage/protection business, etc.
Multiple of Earnings Before Interest and Tax (EBIT)
Typically suits: Share Purchase, where the purchaser wishes the intermediary business to continue to trade profitably and service clients. This is often the preferred method of valuation by purchasers of medium to large IFA businesses, and multiples are more likely to include a premium for strategic acquisitions.
Typical multiple: Multiples of EBIT are likely to vary in future, more than multiples of recurring income, as a purchase is more likely to be acquiring for strategic purchasers. The typical multiple is currently around 6 times EBIT, but ranges from 2 to 10 times.
Positive influencers on multiples: As per multiple of recurring income plus clear Succession Plan, robustness and diversity of income streams, staff expertise, specialisms and retention, scalability, potential to grow, location and business premises, possible TUPE issues, complaints history and potential liabilities, etc.
Multiple of AuM
Typically suits: Historically used by fund management groups but occasionally used now for purchase of an IFA firm with sizeable assets on a single platform or discretionary fund manager. More likely to be used in conjunction with one of the other valuation methods above.
Typical multiple: multiples have varied from 0.5% to 1.5% AuM historically but the higher multiples have usually been applied to discretionary managers.
Positive influencers on multiples: As above but also high volumes of AuM, high persistency rate, single platform for managing assets.
Discounted Cash Flow Forecasting
This is a very rare method of valuation for the IFA sector and is complicated, relying on projected income and expenditure over future years, so you will need advice from an accountant if you wish to look into this method of valuation. It is worth bearing in mind, however, that a number of larger consolidators will model their deals based on a number of discounted cash flow forecasts previously undertaken and certain assumptions they will make about future acquisitions.
If you are interested in engaging one of IFA Marketplace's valuation partners to help value a specific business please contact us.
Costs for a formal valuation vary from £1500 to £5000 plus VAT depending on turnover.