Your business is probably the most valuable asset you own, so now that you’ve arrived at the decision to sell, you need to determine how much you are going to be willing to take. Setting the right price is essential, so find out how you can maximise your IFA business valuation.

What’s your business worth?

You might be tempted to take the first offer you receive in order to achieve a quick exit, but this could mean missing out on the real value of your business. If you’re an astute buyer, you will consider every aspect of your business, from cash flow to profitability and from employee terms and conditions to culture. You must prepare to be scrutinised from every angle. An objective approach to IFA business valuation is essential and there are a number of established valuation methods – this guide looks at each one.

Recurring income

In the IFA market, businesses were traditionally valued on their recurring income. Over time, the model has become more complex and has moved away from commission to ongoing adviser charging. This has led to a more complex analysis of what recurring income actually is in relation to any particular business. However, valuing the funds under management that generate recurring income is still appropriate, particularly for smaller businesses.

As a rule of thumb, calculating 3-4x recurring income is common for this kind of valuation, although more complex models have developed which use multiples twice this amount. The larger the multiple, the greater the returns your buyer will expect – and the more caveats and requirements they are likely to require. Our advice is that you should be fully aware of these details, and to be especially careful of ‘profitability overlaying’ – this is where your buyer asks for a percentage of profitability that you have to achieve in order to realise the agreed target multiple. If this level of profitability is not achieved, the multiple is significantly reduced, along with the final price achieved.

Reductions often operate on a multiple of the difference between the target recurring income and the actual recurring income. This means reductions can be substantial, even when the difference between the target income and the actual income is modest. It’s therefore very important to look at the small print and conditions of the offer being made and decide whether the target is achievable.

Deferred consideration

Deferred consideration is common. You can expect your buyer to pay a percentage on completion and then to pay the remaining balance over a two-year period. We tend to see a payment profile of 50% of the projected consideration on completion, with two further payments of 25% of the deferred consideration on the first and second anniversaries of completion.

With deferred consideration, there are a number of things to bear in mind:

  • Deferred payments will often be adjusted so that the multiple of recurring income is reflected in the overall price. The multiple might be agreed as 3.5x the recurring income over the two years following completion. The first and the second payments would be adjusted to reflect the actual, rather than projected recurring income
  • If you’re accepting deferred consideration from a buyer, it’s important that you consider the financial ability of the buyer to make the deferred consideration payments
  • As the seller, you must have the right information and relevant accounting principle to make sure the deferred consideration has been calculated correctly and include this in the agreement between you and your buyer
  • You must agree on the timings of deferred consideration payments and if there are any conditions attached to payments and any interest rate. You should ensure these details are written in your agreement

Net asset value

When a buyer purchases the shares of the business, the company carries on as normal with all of its assets and liabilities. It’s usual for the buyer to ask that certain assets, (generally fixed assets, but could include current assets), are disposed of. Conversely, the seller may also wish to take dividends prior to completion.

Unless your contract specifically states that the buyer pays for the net assets in addition to the purchase price of shares, the net assets are considered as part of the sale within the value placed on the shares. However, some buyers may agree to pay for the net assets in addition to the share price, typically based upon a multiple of revenue or profitability, giving an additional benefit to you.

The calculation of net assets should reflect the realisable value of your assets, minus all current and future liabilities of the business at the date of sale. This calculation will be based upon a set of completion accounts. These will be drawn up by you and your accountants and agreed with the buyer within a set time period.

Completion accounts

In all share purchase agreements, it’s necessary to establish the assets and liabilities of the business on the date of acquisition. This will be undertaken irrespective of whether there is an agreement to pay an additional sum for the net assets.

The work will generally be undertaken at the vendor’s cost by their accountants who, within a set timeframe, will prepare draft accounts under UK accounting standards for review and agreement with the acquirers and their auditors. These accounts will form the basis of the net asset value calculation and where included in the contract, will result in an adjustment to the purchase price. Whilst some acquirers may offer to carry out this valuation themselves, the final figures should be agreed by both parties and not imposed on you as the seller.

EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation)

EBITDA is a measure used to calculate the amount of cash generated by the operations of a business, before financing costs and taxation. As such, it’s frequently used to value a services business. However, whilst this is a simple concept for a standalone business, it can be subject to a different basis of calculation within a group context. When EBITDA is discussed, first determine whether it’s being defined as ’pre-acquisition EBITDA,’ generally measured by the latest management and statutory accounts of the company, or ’post-acquisition EBITDA,’ which reflects the ongoing profitability of the business in its new format, as part of the enlarged group.

The advantage of post-acquisition EBITDA is that the value is inflated by the cost savings generated by the enlarged group and should result in a higher valuation. However, care should be taken to ensure that the acquirer doesn’t add ‘apportioned or allocated’ costs in this calculation and that you fully understand the financial impact of these charges on your total consideration. EBITDA can also be used as a hurdle to prevent the full payment of your consideration; an example would be a requirement to achieve a certain level of profitability, say 30%, measured by EBITDA divided by total revenue. If this is the case, ensure that you’re clear on what costs can be included in the calculation and that they relate solely to your business.

Above all, carefully consider subjective or unquantified costs and ensure that the contract provides suitable protection for the calculation of deferred payments since subsequent renegotiation is unlikely to be successful.

Whether you’ve made a decision to sell your business, or are still in the consideration stage, it’s critical that you plan properly, do your research and get the advice you need. Remember, all companies are different and there are many factors that can affect your value.

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