'Legacy' the key to practice valuation

The most important element of advice practice valuation is the legacy the business leaves behind, says Forte Asset Solutions director Steve Prendeville.

In an article for the upcoming ifa magazine, Mr Prendeville said there are several ways in which a business can be valued, and business owners should not rely solely on financial performance as an indicator of their business’ value.

“Business owners need to have an active awareness of what are the internal factors and how can they influence the impacts on their business value,” Mr Prendeville said.

“A valuation cannot just focus on financial performance, and a large part is the subjective assessment of the quality of management.”

Mr Prendeville explained that buyers value an advice firm based on “what legacy has been left”; what key person dependency or client dependency is inherent within the business; and how strong the firm’s revenue is.

“Management performance is benchmarked in a number of ways – accounts receivable, accounts payable, employee turnover (an important identifier to culture) workflow processes, templating, [and] management reporting and monitoring,” Mr Prendeville said.

“[Also] cash flow management, brand development, adoption of innovation, and corporatised offer  [that is] the delivery of advice is not the domain of one but the client enjoys multiple internal relationships and the loyalty is to the brand and not the individual.”

Mr Prendeville said a number of methods can be employed when assessing an advice practice’s value, but a particularly important method is the “market approach”.

“You need to overlay recent similar sales (similar size, location [and] type) to ensure market relativity,” Mr Prendeville said.

“This is difficult for most as this information is normally closely held and therefore a use of a third party to identify risk and assess real value is important in regards to the most fundamental question of ‘what is a business worth’,” he said.

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