Advice Businesses – Going Cheap?
One of the great challenges of the financial planning industry is trying to work out what an advice business is worth.
For the past few years planners have been able to extract relatively extraordinary sums of money from product manufacturers who have been hungry for distribution – but as financial services and banking in general moves from a high growth environment to a low growth environment it might be time to re-run the numbers.
In a lot of ways financial planners, like any other small business owner have a lot riding on their business valuation – because after all – it’s their key to financial independence (something they spend all day talking to their clients about).
But are financial planners basing their retirement expectations on the heady values of their businesses from 2007 and early 2008?
Surely not -just as planners are spending a lot of their working day telling clients that those days have gone, that they have to lower their expectation of investment returns, surely they have applied the same logic to the value of their businesses?
The answer is maybe. In real terms something is only worth what someone else is willing to pay for it.
And compared to many other markets, financial services market is largely an imperfect one so it’s almost impossible to tell what a business is worth?
Perhaps…
One of the outcomes from a decade of solid growth in the industry is that a number of planning and aligned business have floated and as a result are required to publish their profits and losses publically.
Using this data and the power research tool that is Yahoo!Finance we set to work on running the numbers old school on the businesses which are traded on the exchange.
We did this using the 30 minute method – that is ‘find everything you can in half an hour’ (It’s a kind of thumbnail dipped in tar desk-research rule).
This assumption only really works if you believe the price of the listed firms represents goodor fair value. We figured it represents what the market is willing to pay which is close enough.
Firstly, we limited our selection to a shortlist of firms (as we only had 30 minutes). They were: Snowball (SNO), Count (COU), PlanB (PLB), DKN (DKN), Fiducian (FPS) and WHK (WHG).
LetsLook At The Prices – A Tale Of Collapse
We did this analysis on 23 March 2009 and started with the 12 month price history of the stocks. Looking at the chart below there has clearly been a fall in prices (not a good sign, so far as a proxy for thevalue of financial planning businesses).
Its Not the Price ThatMatters! It’s the Multiples?
But these are share prices you might be saying – what are the multiples? Financial planning businesses trade on multiples – normally a multiple of recurring revenue or EBIT.
To investigate this we have introduced a few quick stockmarket terms (all on Yahoo! Finance of course!)
PE = Marketc apitalisation divided by Net Profit after Tax (NPAT)
EBITDA =Earnings before interest, tax, depreciation and amortisation (closest thing togross earnings of a financial planning business)
EBITDA Multiple= Market capitalisation divided by EBITDA (note that EBITDA is used with the stock market firms).
To create the multiples, we used Yahoo! Finance to get the NPAT and EBITDA for 30 June 2008 for these firms and this is shown in the chart below.
However, thisis a quick step to calculate the multiples.
So all we did was we took the market capitalisation at 23 March 2009 and divided it by the NPAT and the EBITDA to get the multiples. This is shown in the table below.
It’s worth noting many of the businesses are below the rough yard stick of 6 times EBITDA!
What about recurringrevenue multiples?
But I can hear you saying “financial planning businesses are usually quoted in terms of amultiple of recurring revenue!”. Ok, so we did a very quick calculation based on the following very quick estimates. We realise it is rough but we only had 30 minutes!
When you graph this it shows an interesting story. Most businesses are below the magic watermark of 3 times recurring revenue which isused by financial planning businesses.
So Getting Bank To The Point;What is your business worth?
The bad news is that on truly empirical terms the values are not going to return to the heady heights of 2007/08 any time soon based on this information. But after all you probably guessed that.
So it means that the process of simply opening an advice business meant that you were manufacturing a business of great value – now it seems to really be successful- you are going to have to build a brand, segment your clients and stand for something in the minds of the consumer – it’s no longer going to be enough just to take orders.
Iain Wish says:
Discontented is clearly discontented. I have over 100 tales of where I as a financial planner have saved clients money, obtained critical illness payouts,got them their money back after bank mis-sales and generally put the right money in the right hands at the right time. Modern Portfolio Theory and asset allocation (rammed down our throats by the educators and regulators) went out of the window in 2008 to date – the value of everything went down and, with it, the value of advisory businesses. Crystal balls were in short supply. A UK Certified/Chartered financial advisory business is still worth something – those fimrs who’ve not adopted cashflow modelling and professionalism/fee charging are on the way out. A good CFP can advise you if you even need to play the equity investment game at all to meet your goals. Upwards and onwards.
John Curtin says:
As usual you are looking at FUM to value a business. Totally ignoring that the real business is risk which has a built in recurring commission far above what FUM pays as well as far superior upfront commission.
The market really has no idea at who generates the cash flow in this industry.
Low and behold all these investment advice gurus have now discovered that risk, may well save them from going out of business, when no wants to pay to get advice on investments in this market.
Its about time the market got real and started valuing a business on the amount of risk business it holds.
discontented says:
When EVERYBODY got it wrong HOW DARE they project themselves as financial advisers ?!!
WHY should anyone PAY for their opinion ?
So , the business is worth what their opinion is worth…………….NOTHING !