Valuation for Financial Planners – not all revenue is created equal
After a very frantic (and troublesome) year for the financial planning industry with the Royal Commission, FASEA and multiple regulatory changes, valuations are now vulnerable.
I have seen multiple examples of business owners electing to walk away from their businesses and close the doors. This is the worst possible way to extract value from the business.
Many financial planners are still living back in the days when a multiple of revenue was the industry standard and businesses were valued, financed and sold on this basis. This is no longer the case and hasn’t been the case in most businesses for a long time, if ever. Multiples of revenue do not reflect risk or underlying performance. Two businesses can both turnover $1mil; one can make money (profit), be well managed, mitigate risk and build a sustainable business. While the other can lose $100k per year, be very inefficient, poorly run and covered in risk – they cannot possibly be valued at the same amount!
In many financial planning firms, there are specific risks which are not being covered and are not included in valuations. For example, the new rules cover client reviews – how often are they performed? If a planner has clients who haven’t been reviewed for greater than 24 months this is very risky revenue and this cannot be included in the valuation. If you take this revenue out (or at least discount it substantially) is this business still profitable? If you look to raise pricing/fees to cover the cost of delivering reviews – will the clients stay?
Planners cannot afford to ignore the valuation issues arising, but they should also be seen as an opportunity. Changing business process, systems, client engagement and financial models should make for a more profitable, resilient and valuable business.