Vale Valuations?

Mark Twain, the great American author, is credited with the famous quote – “reports of my death have been greatly exaggerated”.  This followed an article in the New York Journal of 2 June 1897, wrongly recording his demise.

Much has been written about the death of valuations for wealth management businesses in the “new normal of the 2010s” (or whatever buzz word now applies).  And like the 1897 New York Journal obituary, more recent reports of the death of wealth management valuations are also greatly exaggerated.  However, as pointed out in this special T&C blog, valuation rules may have changed irrevocably.  Great businesses that throw off growing earnings streams and which also deliver synergy and strategic benefits to buyers will always demand top dollar.  It’s the “same old, same old” businesses that face a new normal for valuations in light of FoFA and fundamental shifts in consumer behaviour.  As we alluded to in T&C’s last regular Fortissimo blog, (“Much More Than Just a Sales Call” – T&C August 2013), a more fulsome strategic response is required by wealth management businesses in order to “amp-up” valuations to pre-FoFA and GFC levels.

 

Valuation Parameters

The old rules for valuing financial planning or accounting businesses were simple – determine the revenue and apply a multiple, usually the hackneyed 3X recurring revenue for financial planning.  In recent times the EBIT multiple (which sensibly introduces expenses into the valuation picture) has emerged as a preferred methodology.  All “rules of thumb”, however, have their limitations.

Ultimately the value of a business is determined by the amount and timing of the cash it generates in the future.  Pre-FoFA, when product payments roamed the planet and consumers were relatively amenable, financial planning practice buyers were entitled to feel confident that an acquired business’s future cash flows were relatively secure.  FoFA and scarred GFC consumers have irrevocably changed that paradigm and prospective buyers are justifiably cynical about the quality and maintainability of target business earnings.

So what’s the answer for business owners wanting to sell at historical valuations?  Answer – give the buyers what they want!

First, buyers need to be assured of the strength of the client relationship and will expect that it is contractually secured and protected.  Secondly, they want to see that the fees charged to clients are explicit and at commercially sustainable levels.  It’s very hard for buyers to maintain and increase advice based fees if they have been systemically undercharged in the past.

Finally, buyers are vitally interested in how advice and investment solutions are delivered to clients.  Is the seller’s “package” compliant and, more particularly, can the “package” be integrated into the buyer’s own business systems (and what are the potential synergy or strategic benefits)?

The good news is that the twin disturbers of emerging technology and legislative upheaval collectively drive changes that enable the savvy and willing practice owner to re-engineer and re-organise in a way that satisfies the needs of prospective buyers.  Where there’s a will, there’s a way (with a little help from T&C of course!)

 

Valuation Particulars

As Mark Twain also quipped, “all generalizations are false, including this one”.  Valuations are complex beasts.  Experience has taught us at T&C that there are no simple, universally applicable valuation parameters and each business is different.  For buyers, “beauty is in the eye of the beholder”.  At T&C, we work with both buyers and sellers of wealth management businesses to move beyond the realms of generalisations and into the detailed world of business models and valuation particulars – bringing buyers and sellers together in a “win-win” situation.  That way, nobody gets to die!