Advisory businesses missing out on $1.1m value gap: CFS

Colonial First State’s The Hidden Value Report, released in collaboration with Succession Plus, has highlighted that many advice firms are not optimising their practices when it comes time to sell.

The ‘value gap’ referred to throughout the report is a simple equation, measuring the difference between the potential value of a firm and its current value, highlighting spaces where business owners could be enhancing their practice to best prepare for a sale.

The trend is evident in data from all practice sizes, with firms employing 0-9 on average having a gap of $333,200, firms of 10-29 employees with a gap of $1.5 million, and larger firms (30 plus) having an average gap $4.7 million.

Of the 116 businesses benchmarked for the report, 58 per cent were found to have a value gap of more than $500,000, with half of this number having less than 10 employees.

“This value gap represents a huge opportunity for owners to invest time, effort and money to grow the equity value of the business – this should be a primary focus for any owner,” founder and chairman of Succession Plus Dr Craig West explained.

One method in helping close the gap, the report suggested, is considering less traditional methods of business valuations.

“Traditional valuation models can be problematic,” the report highlighted, stating that using a multiple of revenue “may not provide an accurate representation of business value”.

Two methods the report emphasised are being used by some institutions are:

- Recurrent revenue, an approach that multiplies the annual revenue by an agreed multiplier; and

- Multiple of NPAT, an approach that multiplies the annual net profit after tax by an agreed multiplier.

The exit readiness of firms is also another contributing factor to value gaps. Though the report found 85 per cent stated they are prepared for an unplanned sale, one in two businesses said they would struggle to operate without their owner, and a quarter have no contingency in the event of the owner being unable to return.

With one in three owners wanting to exit within the next five years, this poses an issue to the value of any potential sale.

Reducing owner dependency will not only help the business become a more attractive prospect for a buyer, it will also enhance operations.

“If owners are working more than 50 hours a week, we view it as a red flag because it suggests that the business doesn’t have a succession strategy in place and it’s not well documented and systemised. This makes the business higher risk, and higher risk equals lower valuation,” West stated.

One way of reducing owner dependency is through attracting and retaining high quality talent within the firm. Eighty-one per cent of respondents within the report highlighted that they greatly value their employees.

“The recruitment market is highly competitive, and employee demands and loyalties are changing,” the report said.

“Providing a competitive salary is important, but it is no longer sufficient on its own to retain talent.”

Incentives, such as employee equity models and share plan programs “are powerful tools to grow a business”, helping attract high-quality talent to a financial advice firm, closing that value gap even further.

"While 85 per cent of advice businesses report being prepared for an unplanned sale, there remains an average value gap of $1.1 million across these businesses,” CFS group executive distribution Bryce Quirk said.

He added: “This presents a significant opportunity for the industry to enhance business value. With established practices looking to exit, ambitious firms eager to expand, and substantial capital flowing in from non-traditional sources, now is the perfect time to understand and maximise your business's value.”