Hold or Fold?
Nobody likes to miss out, especially if missing out impacts fundamentally on your future livelihood.
Missing out on a parking spot or missing a train is fine, but for many financial planning businesses contemplating being sold, missing out has taken on a whole new dimension.
To illustrate the extent of this missing out burningpants has devised a pricing model and made a handful of straight forward assumptions.
This article uses the same approach as one written back in March ( Advice Businesses – Going Cheap? ) but turns to the question of when advisers should sell their business?
Our pricing model is based on using the 30 minute method – that is find everything you can in half an hour (a kind of thumbnail dipped in tar desk-research rule).
In keeping with our approach to this analysis, we devised a few basic assumptions when assessing financial planning businesses:
- $40M in funds under advice as at September 2000 (the time of the Sydney Olympics)
- To approximate monthly changes in funds under advice we used changes in the All Ordinaries Price Index (because this was easy to download from Yahoo! Finance)
- Recurring revenue was made equivalent to 60 basis points on the funds under advice
To show valuations over time we used monthly data from Yahoo and then projected this into the future at 8% per annum until July 2012 (the month of the London Olympics).
As it was simple to calculate we used three times recurring revenue and adopted two approaches for measuring recurring revenue:
- The average of the last twelve months of monthly revenue
- The current month multiplied by twelve
As most people are aware, the majority of advice businesses are correlated with share market movements due to a notable proportion of adviser income are asset based fees.
Valuations were therefore down by half of what they were in the later half of 2007 when practice valuations peaked.
Not surprisingly, the value of this type of business goes up and down like a client portfolio. The chart below shows the two different valuations:
- The blue line is the value over time when recurring revenue is calculated using the last twelve months of data
- The black line is the value over time when the recurring revenue is calculated using the latest month of data (hence it is more jagged)
There are some interesting points at different times on this chart:
1 October 2007 – March 2008. Clearly this was a great time to sell your business (especially if you had a last 12 months recurring revenue calculation).
2 May 2008 – January 2009. There is a big difference between the black and blue line in the chart here. Our understanding is that advisers stopped wanting to sell and at the same time deal terms changed from being based on the last 12 months to last three months or even the last month (to allow for the gap between the two lines!)
3 May 2009. Today values are half of what they were at point 1. Clearly planning values are a valuable asset but they do go up and down!
4 Future. The value of your business will be heavily dependent on what you think will happen in the market.
When should I sell my business?
• Whilst most vendors have in mind a dollar price for their business, the value of a financial planning business is clearly correlated to the market.
• It is probably important to acknowledge this as purchasers will want protection for this and so will you. This value will go up and down depending on when (ie the timing) you sell your business.
• So, in terms of when to sell, if you can time the market – then go for it. On the other hand, if you can’t, there is no point in waiting if you need to sell.
• A real challenge with timing the market is that it takes time to sell a business – often six to twelve months from pressing the button – which is likely to remove any timing benefit.
• A deal that may be attractive will be one that allows for the value today as well as some upside as the market recovers.
• Lastly, if you can find someone with the funds to purchase in these times then it is probably worth considering them. Otherwise you may be waiting until after the next Olympics!
Anonymous says:
hoorah, I sold my practice in July 2007 after 24 years in business. Best decision I ever made.
Still only 45 at the time, life now has choices. As I answer when asked why sell a successful business,’ i wanted to wag the tail for a change and not have clients wagging the dog’