The managing partner for consultancy Harrison Spence said that, while purchasers were often willing to pay four times a firm’s annual revenue two years ago, it was more likely now that vendors would receive a figure closer to two and a half times their recurring revenue.
Mr Spence said: “On a business with £400,000 recurring annual income, this is equal to a drop from £1.6m to £1m. We are talking about a near 40 per cent fall in a short space of time.
“If the vendor’s house price had fallen by that much, he would have lost a great deal of sleep.”
The fall in value could be attributed partly to the fall in supply and demand, with Harrison Spence data suggesting vendors were now outnumbering buyers.
Other factors include uncertainty in the market and changes in the way advisory practices are valued.
Mr Spence said: “Net profit is being used more widely as a valuation metric. In the years ahead, it may become the standard measure across the industry.
“Many advisory firms could come unstuck as they are set up to maximise income for owner-managers, not generate profit for a separate corporate entity.
“This means there is often no real net profit and a business could be massively undervalued by conventional accounting metrics.”
ADVISER VIEW
David Crozier, co-owner of Newry-based Navigator Financial Planning, said: “I have heard anecdotally that figures are reducing and it is true to say that there is uncertainty.
“However, those with their ‘ducks in a row’, with a proper business structure, will be more robust and less vulnerable than businesses relying on trail or fees for transactions.”
