When valuing professional services businesses, one of the most critical yet often overlooked aspects is client ranking. A well-organised client ranking system not only allows for a clearer picture of a business’s revenue streams but also adds strategic insight into client value. Client ranking is particularly impactful in industries such as accounting practices, mortgage broking businesses, insurance broking businesses, and financial planning businesses, where client relationships and retention are closely tied to profitability and business stability.
1. Accounting Practices
In the realm of accounting, the value of a client often extends beyond immediate revenue generation. Long-term client relationships are common, and repeat business, including tax season services, advisory roles, and compliance work, often drives significant revenue. Client ranking in this sector can impact valuation in the following ways:
- Revenue Consistency and Profitability: Ranking clients by revenue consistency helps identify which clients contribute to stable cash flow. In accounting, clients with annual or recurring needs like tax planning or compliance work are especially valuable as they ensure predictable revenue.
- Client Complexity and Service Scope: Some clients may require specialised services, like audit or financial consulting, which may yield higher margins than standard tax preparation. Ranking clients by service complexity can showcase the firm’s capability in handling a range of client needs, potentially increasing the practice’s market appeal.
- Retention Probability: An accounting practice’s valuation will improve if it can demonstrate low churn. Clients ranked high in loyalty or long-term retention potential signal that future revenue is more secure. Potential buyers often view strong retention as a proxy for client satisfaction and stability, adding value to the practice.
2. Mortgage Broking Businesses
For mortgage broking businesses, client ranking plays a pivotal role in assessing both current and potential future income streams. In this industry, client lifetime value (LTV) and retention are crucial due to the recurring nature of mortgage refinances and new mortgage originations.
- LTV and Repeat Business Potential: Clients who are likely to return for refinancing contribute significantly to the business’s value. Ranking clients based on their LTV can signal a strong pipeline of future revenue, which directly enhances the valuation of the brokerage.
- Referral Potential: In mortgage broking, referrals are a common source of new business. Clients who have previously referred others or show a high likelihood of doing so should be ranked higher. Their value extends beyond their individual contribution, as their networks can drive significant business growth.
- Google Reviews and Recommendations: This along with the previous point build towards a brand. Brand strength is what will see the business continue to grow its sales.
- Risk Reduction through Portfolio Diversification: Ranking clients by risk can be particularly valuable. Clients from diverse industries and financial backgrounds can mitigate risks tied to economic shifts affecting a particular client type. Buyers are more likely to value a client base that is spread across multiple demographics, reducing the impact of market volatility on future revenue.
3. Insurance Broking Businesses
In the insurance broking field, client ranking can help a brokerage demonstrate its understanding of policyholder value, policy retention, and cross-sell potential. Unlike other sectors, insurance broking relies heavily on the strength and diversity of policies, making client ranking essential in portraying overall portfolio value.
- Policy Retention and Renewal Rates: Ranking clients by policy renewal rates is critical. Clients who consistently renew policies reflect strong relationships with the brokerage, highlighting a steady income stream. These clients contribute to both short- and long-term revenue stability, an appealing feature for potential buyers.
- Cross-Selling Opportunities: Some clients may hold multiple policy types (e.g., health, property, and casualty insurance) or have shown a willingness to expand coverage. Ranking these clients higher demonstrates the brokerage’s capacity to cross-sell, enhancing its revenue per client and positioning it as a well-rounded insurance provider.
- Claim Frequency and Risk Assessment: Insurance brokers benefit from ranking clients based on claim frequency and risk profiles. Clients with fewer claims or those who maintain high coverage but exhibit lower risk will positively impact valuation, as they suggest lower payouts and higher profit margins. These low-risk, high-coverage clients enhance the brokerage’s appeal to buyers by signalling a more stable, less volatile revenue structure.
- Buyers will often ask me to break down the income into its categories for risk assessment. Following is a risk rating according to category.
- Commercial Clients (Low Risk, Stable Industries): Highly attractive for predictable revenue with low claims risk, ideal for steady cash flow.
- Domestic/Personal Lines Insurance: Reliable income source with high retention and manageable risk due to essential coverage needs.
- Commercial Clients (Higher Risk Industries): Attractive for high premiums and cross-selling opportunities, appealing to brokers experienced in risk management.
- Marine Insurance Clients: Lucrative for buyers with expertise in maritime risks, offering high premiums but variable claims.
- Specialised/Niche High-Risk Clients: High premiums but volatile, appealing to niche buyers skilled in high-risk underwriting and claims handling.
4. Financial Planners
In financial planning, client ranking is particularly impactful because of the emphasis on long-term, trust-based relationships and the potential for ongoing service fees. The depth and quality of relationships in this field can significantly influence a business’s valuation.
- Assets Under Management (AUM): Ranking clients by AUM is a common approach in financial planning. High AUM clients not only generate consistent revenue but also indicate trust in the planner’s management, which appeals to buyers looking for reliable, long-term income sources.
- Fee Consistency and Growth Potential: Some clients may be on a retainer or fee-based model, generating predictable, recurring income. Ranking clients who are likely to grow their portfolios, such as those nearing retirement or inheritance events, can highlight future growth potential, which is valuable during valuation.
- Cross-Selling Opportunities in Wealth Management Services: Many clients seek multiple financial services, such as estate planning, retirement planning, and investment advisory. Ranking clients by cross-selling potential, including those open to additional services, underscores the planner’s capacity to maximise revenue per client, a valuable attribute for prospective buyers.
When someone looks to buy your business, they are really buying your clients, your infrastructure and your staff. Understanding the value in your clients is the key to valuing the business and the key to a successful sale.
