Lower risk leads to greater value

Financial advisers need to minimise the risks associated with their practices in order to realise the highest value for their businesses when looking at succession planning, according to a leading accounting firm offering consulting services to practice owners.

HLB Mann Judd believes one of the main areas advisers need to examine when addressing risk and how it relates to practice valuation is the methodologies involved with remuneration structures.

HLB Mann Judd principal, corporate finance, Vicki Massey said the key factors to consider in regard to remuneration are structure and transparency. This means having clear definitions of the service being provided and how much the client will be charged for that service, irrespective of whether the revenue is collected via a fee or through commissions.

HLB Mann Judd senior consultant, corporate finance, Nicholas Hilton emphasised the importance of being able to justify remuneration practices.

“Businesses where it’s not so clear how they collect the money, and what the actual process and the service offerings are, we’d probably consider those businesses to be more risky and, therefore, they would have a lower value,” he explained.

Another area HLB Mann Judd looks at when helping to value planning practices is key man risk.

Hilton said: “If all the relationships are actually imbedded in one person and that person leaves, then how can the business have continued earnings.

“The other side is what if there are other staff that aren’t proprietors or owners, and they’ve got their relationships within the practice, is there a way to ensure they’re going to hang around and not leave and take the relationships with them,” he added.

According to HLB Mann Judd partner Rob Neill, the key to valuations and succession planning is all about continuity.

“Our view of what constitutes succession planning is making sure that the business has continuity beyond the involvement of the current stakeholders,” he said