What could your business be worth?
The fact versus the myth
Fact: All the value in an IFA business is created by ongoing renewable income.
Why?
- If a business writes a lot of up-front commission the saleable value of the business is still minimal as it cannot be counted on from year to year
- If a business has an ongoing renewable income (i.e. income that is paid every year), a buyer will be happy to pay for the purchase of that income stream
- A potential buyer will be even happier to pay for an ongoing renewable income stream if it is considered ‘sticky’ (i.e. collected via a Platform or Wrap service).
Myth: When you transition from up-front commission earnings to a renewal income stream you will starve or do it tough for 3 years until the renewals build up.
Why?
- Many advisers don’t really know what they are doing when they start the transition process
- Many advisers believe they must surrender taking up-front commissions or fees when they start taking ongoing income
- Often advisers do not know how to demonstrate their value to clients
- Advisers do not know always show that they are treating their clients fairly.
Did you also know: In financial services markets around the world, a renewable income stream is saleable at a multiple of its annual value.
- Generally this multiple ranges from 1 times the annual income stream to as high as 5 or 6 times the annual income stream
- The actual value paid will depend on a range of factors largely driven by the purchasers interests – not the sellers
- An example: J&F IFA has an ongoing renewable income of £200,000 collected via the XYZ Wrap.
J&F IFA is worth the following at various sale multiples:- 1 times ongoing renewable income = £200,000
- 2 times ongoing renewable income = £400,000
- 5 times ongoing renewable income = £1,000,000
Your business
Take a minute to answer the following questions using the interactive calculator below.
Question 1: Your clients
Think five years into the future and imagine the existing problems in your business have been rectified. With this in place, how many clients would your business choose to look after?
50? 100? 500?
Enter this number in line 1 of the calculator below.
Question 2: Your annual renewal income
Keeping in the above scenario, in a business that deals only with those clients it chooses; what would be the average annual renewal income paid by each of these clients?
This income could be collected as an assets-under-management fee or trailing commission via the Platform or Wrap service that you use. Your best clients might pay thousands of pounds per year whilst your other clients may pay considerably less.
With this in mind, what will the average be across all clients?
£1,000 per client per annum? £2,000? £5,000?
Enter the average figure in line 2 of the calculator below to see the average renewal stream you have created.
Question 3: Your business's worth?
What multiple do you believe you could get for this business should you decide to sell it? This, of course, will be an estimate so enter a figure that you believe is achievable.
Is it 1 (for 1 times)? 2 (for 2 times)? 5 (for 5 times)?
Enter this figure into the calculator to find out how much your business could be worth.
The Calculator
Your results
Surprised?
Think about this…
Using a multiple of renewal income, what is your business worth today?
My current business value is £__________
Using the Final Sale Value from the calculator, what could your business be worth in 3-5 years?
My future business value is £__________
Is it worth putting in the effort required to realise some or all of that value?
Potential Realisable = Future Sale - Current Sale
If you could be shown how to without starving to death on the way, would you give it a try?
FP Advance can help you realise the value that currently sits in your business by giving you the tools and templates you’ll need to transition profitably.
Of course, there will be work involved on your part, but the size of the prize surely makes it worth the effort.
Check out our case studies to see how we have helped other IFAs make the transition.
Are you ready to be next?
