FOFA changing practice valuations to EBIT focus

A survey has found the way financial planning practices are being valued is changing from a recurring revenue multiple to a profit-based valuation model.

According to results from the No More Practice Business Valuator, multiples of profit are for the first time delivering higher valuations for financial planning practices than multiples of recurring revenue.

Vanessa Stoykov, No More Practice creator and chief executive officer of evolution media, told ifa she believes the Future of Financial Advice (FOFA) reforms have played a role in this shift.

“There are many reasons for the findings. People are charging more fee-based revenue, which more than likely would yield a higher profit margin than recurring revenue,” she said.

“This can be related to the impact of FOFA, where there is a fee-for-service model.”

Stoykov said people are also looking at their business models more than ever, and looking for a way to deliver to the consumer.

“We have 20,000 subscribers; 22 per cent are in succession mode, meaning they are looking for a buyer in the next one to three years. They are thinking about what they are going to do with their business,” she said.

“It hasn’t just been those in succession mode; those in growth have been focusing too. Our audiences are looking for growth opportunities because they want to know what they’re worth now and how they can improve their value.”

Stoykov said other businesses are usually valued on multiples of profit and that it would be “interesting” if the financial planning industry follows suit.

“While initial results from the No More Practice Business Valuator have indicated the profit valuation multiple is significantly higher on average, it remains to be seen whether this will expedite the demise of the multiple of recurring revenue,” she said.

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