Financial planning businesses are often discussed in terms of recurring revenue and market multiples. An owner may hear that client books are selling for a particular multiple and naturally apply that figure to their own recurring income. The calculation appears straightforward.
However, buyers rarely assess a financial planning business using revenue alone. Two businesses with similar recurring income can attract very different offers because the buyer is also considering profitability, client quality, compliance, staff capability and the likelihood that the relationships will transfer. Understanding what buyers are really assessing can help owners form a more realistic view of their business and identify areas that may need attention before a sale.
Buyers are purchasing expected future income
Historical revenue is important, but a buyer cannot purchase income that has already been earned. They are purchasing the expectation that clients will remain and revenue will continue after settlement.
That creates several important questions.
– How closely are the clients connected to the principal adviser?
– Are the relationships supported by other members of the team?
– Are the client files current and complete?
– How much work is required to service the book?
The stronger the buyer’s confidence in the future income, the more attractive the business is likely to be. Where the revenue appears uncertain or heavily dependent on one person, the buyer may seek a lower price or more protective payment terms.
Revenue and profitability are not the same
A large client book may generate substantial revenue without producing equally strong profits. Some clients require frequent meetings, complex advice and significant administration compared with the fees they pay. Others may be highly engaged, easier to service and more profitable. A buyer may therefore examine the average revenue per client, the amount of adviser time required and the cost of providing the promised level of service. They may also look at whether the business has priced its services appropriately and whether staff are being used efficiently. A smaller, organised and profitable client base can sometimes be more attractive than a much larger book that is difficult and expensive to service. The buyer is not simply purchasing revenue. They are purchasing sustainable earnings.
Are clients connected to the business or one adviser?
Personal relationships are central to financial planning. Clients often remain with an adviser because of the trust built over many years. That trust is valuable, but it can also create risk during a sale. If clients have only ever dealt with the principal adviser, the buyer may be concerned about what happens when that adviser steps away. A stronger and more transferrable business will usually have clients who also know the broader team. Associate advisers, client service managers and administration staff may already play an active role in the relationship. It also helps when the client’s history, preferences, objectives and service requirements are properly recorded. The aim is not to make the relationship less personal. It is to ensure that the business can continue supporting the client even when ownership changes.
The quality of the client base matters
Not every dollar of recurring revenue carries the same level of risk. A buyer may look at the age of the clients, the services they use, the likely duration of the relationships and the amount of future advice they may require. They may also assess whether the business has established relationships with the next generation of the client’s family. Client concentration is another important issue. If a small number of clients represent a large proportion of revenue, the loss of one or two relationships could have a significant financial impact. A broader and more balanced client base may give the buyer greater confidence.
Compliance and client records affect value
A buyer needs to understand the advice history and ongoing obligations associated with the client base. Incomplete files, outdated information or inconsistent documentation can create substantial concern. The buyer may need to invest time and resources reviewing or correcting the records after settlement. They may also worry about whether there are undisclosed compliance issues within the business. Strong documentation demonstrates that the business has been managed professionally. Current client agreements, review records, fee consent arrangements and compliance files can all help reduce uncertainty. These records are not simply an administrative requirement. They form part of what the buyer is purchasing.
A capable team can make the business more transferrable.
Experienced staff can add significant value to a financial planning business. They may already understand the clients, systems and daily operation of the business. Their continued involvement can support client retention and reduce the buyer’s transition risk. A buyer may consider how long employees have been with the business, whether they hold meaningful client relationships and whether they are likely to remain after settlement. A business with clear roles and capable staff is usually easier to transfer than one where every decision and relationship depends on the owner.
Systems create confidence
Buyers want to understand how the business operates. Consistent systems for onboarding, annual reviews, fee renewals, compliance checks and workflow management make the business easier to assess and operate. Documented processes also demonstrate that the business is more than a collection of relationships held by one adviser. It is an established operation capable of continuing under new ownership.
Preparing the business for a future sale
Owners do not need to wait until they are ready to sell before improving the business. They can begin by reviewing the quality of their client records, analysing the profitability of different client segments and involving the broader team in client relationships. They can also document key processes and reduce unnecessary dependence on the principal adviser. These changes can make the business more attractive to buyers, but they may also improve the way it operates today.
Understanding what the buyer is really purchasing
Recurring revenue is an important part of the value of a financial planning business. However, the buyer is also assessing the quality, profitability and transferability of that revenue. BCI Business Brokers works with financial planning business owners who want to understand their value, prepare for a future exit or identify a suitable buyer. A client book can generate income. A strong business gives the buyer confidence that the income will continue.
If you want to know more feel free to reach out. Contact us for personalised assistance and expert guidance.
Regards,
Tony Arena