Small advisory businesses should not be valued by the same measures applied to large firms, the managing partner of Harrison Spence, Brian Spence, has argued.
Mr Spence said those advisers hoping to groom their practice for a sale have started to find that the standard valuation matrix for IFA practices – approximately three times recurring income – has changed.
Now, because supply is limited, some buyers are willing to pay more for good practices, but the way in which they are valuing firms can differ significantly.
Mr Spence said one factor affecting prices is that acquirers are increasingly looking at earnings before interest, tax, depreciation and amortisation – or profitability – as a measure of quality and therefore value. In some cases, firms can achieve a sale price of up to six times their Ebitda.
However, Mr Spence warned against small firms applying the same measure. He said: “The focus on Ebitda can be disadvantageous for smaller or ‘lifestyle’ businesses, since profits tend to be limited after income is drawn.
“The lesson is that if you plan to sell, it pays to plan.”
Adviser view
Andrew Oliver, founder of Kent-based Andrew Oliver & Co, said: “I do not see how Ebitda is relevant to small IFA practices and, as Mr Spence says, it can be used as a gimmick.
“So, the real question should be what method of valuation paints the best picture for the seller. At the moment, it appears to be the buyers who are – in my view – trying to talk down the value of some practices by referring to them as ‘lifestyle businesses’.”
