Advisers overvaluing practice values

Advisers overvaluing practice values

Financial planning practices are overvaluing their businesses by pricing them on emotion or prices received in past years, says Connect Financial Service Brokers chief executive Paul Tynan.

The financial services business broker said advisers, like any vendor selling a prized asset, tend to see value through their own eyes and in doing so “are creating a major issue for themselves”.

“It’s natural for sellers to overvalue their business,” said Mr Tynan.

“It’s been their life, blood, sweat and tears and now selling that lifetime of work is an emotional undertaking – but ultimately it is the current market that determines price,” he said.

Mr Tynan said the most important aspect he discusses with vendors is the reality of the market and the "forces at play that will determine the source of prospective buyers and sale price”.

He said vendors also need to understand that valuation methods are changing.

“The majority of small financial planning books and businesses where the revenue is less than $1 million are still being sold on a recurring income multiple and larger businesses are based on a profit valuation method,” he said. 

He believes more valuations in the future will move to a profit-based formula as buyers seek “sustainable and ongoing revenue”.

FOFA legislation, Mr Tynan believes, has been a catalyst for “a shift towards a higher standard of professionalism with remuneration for advice based on fee for service”.

“Furthermore, FOFA has brought transparency and a need for planners to demonstrate value and the importance and benefit of ongoing personalised advice.”

Consequently, the practices in most demand are well run, efficiently administered enterprises with solid revenue streams supporting a carefully considered target market, according to Mr Tynan.

He said the key factors a practice will be judged on are the client value proposition, the client service experience and the value clients place on the advice they receive.

Mr Tynan added that sellers “must let go of their current business as all buyers will have new service ideas, management culture and value proposition” and recommended using a solicitor who is experienced in the financial services sector.

Advisers overvaluing practice values
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