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Factors that influence the value of a business

Publish date: 24 January 2020
Issue Number: 104
Diary: CompliNEWS
Category: General

By Lee Rossini

In last week’s article, I discussed some of the options available once you have made the decision to sell your business. The million-dollar question hinges around the value of your business? Maximizing the value of a financial advice business is dependent on whether it is managed properly as a viable business. Additional value is possible if the relationships with clients have been ‘institutionalised’ during the life of the business, namely, the client has a relationship with the business and not with an individual. If this process has been successful, clients will continue to have a relationship with the business even if the original owner is no longer part of the business.

In addition, the following factors are likely to influence the value of a business in the eyes of a potential buyer:

  • The type of business entity including ownership structure.
  • Service model offered including delivery of services to an identified target market (including niche markets).
  • The degree to which the services offered by the business are competitive in the marketplace and the value placed on the services by existing and potential clients.
  • The demographics of the client base including age, asset holdings and percentage generated by each client.
  • The attrition rate of clients over the last three years including the degree to which the client base is stable, manageable and loyal to the business.
  • The policies, workflow processes and systems in place.
  • Marketing strategy to retain existing clients and to attract new clients.
  • The age, history and profitability of business since inception.
  • Income model.
  • Assets of the business including the value of assets under management.
  • Human resource management including staff turnover.
  • Degree to which staff are knowledgeable, well-trained and likely to remain after the sale (especially important staff members including key individuals, this is important for continuity in the business and with clients).
  • Current technology stack.
  • Degree to which the compliance requirements are met and whether the business (or any individuals within the business) have been reported to the FSCA, the FAIS Ombud or to a professional membership body.
  • The goodwill, reputation and branding of the business.
  • The ease with which the business can be transferred to a new owner.
  • The location of the business. If the physical location of the business is in an area where potential buyers cannot see the value, the purchase price may need to be reduced.

A potential buyer will also be interested in the financial ratios to determine:

  • If the business is achieving its main objective of maximizing profits;
  • the potential of the business to grown and increase revenue in the future;
  • whether the business is performing above or below industry averages;
  • whether funds are available to meet short-term demands;
  • whether the assets exceed the liabilities; and
  • whether an investment in the business will produce an acceptable return within an identified risk profile.

When interacting with potential buyers, it is of utmost importance to act with integrity and preserve your credibility by honestly answering any questions the buyer may have about the business. Any dishonesty or distortion of figures will unquestionably place doubt on the bona fides of the seller in the mind of the buyer.  In order to sell, the final value should be a realistic and accurate reflection of the business. 

Working Smart

By Lee Rossini

A brand identity is an important factor in the success of a financial advice business; it is essential to be noticed in a competitive environment. Clients are becoming increasingly discerning about the businesses they trust with their financial well-being. Therefore, building a brand that resonates with your target audience is essential not only for attracting clients but also for fostering trust and credibility. Here are some guidelines on how you can successfully create a strong brand identity.

CPD

Subscribers are reminded that they can now complete their monthly CPD quizzes and claim CPD hours. For more on accessing the CPD quizzes, please click on the CPD FAQs button on the top bar of the screen. 

 
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