The increasing number of financial planning firm owners and lead advisers nearing retirement has put succession planning and business valuation under the spotlight. One of the most pressing questions is: What is my firm or client book worth?
The valuation method chosen can make a significant difference to the financial sustainability of the transaction and, in some cases, render the deal uneconomical. Discussions around valuation often default to a multiple of revenue or profit, with familiar measures such as EBITDA or net profit widely accepted. But does that make them the right approach?
On the plus side, these measures provide a convenient starting point. Many industries, including financial advising, are comfortable using a “going multiple” to frame negotiations. These measures are readily available and can speed up discussions without requiring complex calculations – simply applying a factor allows a price to be reached quickly. Additionally, the final figure allows for easy comparison across similar businesses.
A major drawback of the multiples approach is that it fails to capture the fair value of a client book. The client book is the foundation of a successful advice practice, and any miscalculation in its valuation can significantly impact the final price. There are at least three key concerns with relying solely on a multiples-based valuation.
The first is that multiples are backward-looking. They offer a snapshot of historical performance, often covering only the past 12 months, and ignoring future client retention, performance trends, and potential growth. A client book should be valued based on its future earnings potential – this is what buyers should be paying for.
Second, revenue multiples can be misleading because they ignore profitability, a major driver of true value. A client book generating R10 million in recurring revenue with a 15% profit margin is more valuable than a book of the same size with a 25% margin but only half its revenue is recurring.
A third concern is that not all revenue is equal, even when applying profit multiples. The composition and trajectory of earnings matter. For example, a firm reporting R3m in EBITDA may appear financially strong, but if its earnings are declining or unsustainable post-transition, its actual value could be much lower.
Relying on multiples as a primary valuation method is unreliable in determining fair value. If future earnings are not factored in, the valuation is little more than an estimate. Best valuation practices require an assessment of how net earnings will change under new ownership, the impact of an altered operating structure, and shifts in the client value proposition, among others.
If a business or book is priced above its sustainable value, buyers may have to implement changes that could negatively impact the transferring adviser’s experience. Conversely, if the business is underpriced, sellers may be short-changed on the value they have built over a lifetime. Both scenarios increase the risk of deal failures or post-sale complications.
An essential aspect of valuation is client transferability. Why? Because regulation requires financial services providers to obtain individual client consent for transfers. Backward-looking multiples assume all client books are equally transferable, but this is rarely the case in practice. The success of a transfer depends on how well clients have been prepared for succession and the retention strategies of the new adviser. Client books structured for a seamless transition should command a higher valuation.
The valuation method should be carefully assessed before legal agreements are drawn up. You can refine the approach by considering the limitations of multiples (already discussed) and other valuation methods, such as the payback model.
Under this model, valuers propose a percentage-of-flows payback to mitigate client transferability risks. The buyer pays a fixed percentage of future revenue over an agreed transition period. Although this method improves affordability for the buyer, it does not necessarily ensure fair value for the seller. Moreover, most sellers prefer an upfront payment rather than relying on monthly instalments.
A significant risk of using the payback model as a valuation replacement is that it effectively requires the seller to finance their own buyout while reducing their monthly earnings. Although this approach can work in specific cases, it makes it harder to ensure a fair and balanced transaction for both parties.
For FSPs, the priority should be to establish fair value through a structured process. This means basing your valuation on realistic future earnings under new ownership, applying risk-adjusted assessments to reflect both vulnerabilities and opportunities in the client base, and aligning deal structures with practical financing and payment models. Multiples are not inherently flawed, but relying on them without scrutiny is risky, not just for the deal but for the credibility of the industry.
Mandy Murphy is a business analyst and succession specialist at Old Mutual Wealth.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional advice.
