Valuations moving from revenue to earnings basis
The industry is clearly moving away from valuing financial planning practices, based on multiples of revenue towards valuing on an earnings basis, according to Hunts' Group principal Anthony Hunt.
The method of valuing based on revenue does have some logical basis in terms of the traditional financial planning business model, but virtually all other businesses in the world are valued based on multiples of earnings, he said.
The revenue model drives some interesting behaviours and characteristics, he said, and if you think your business will be valued based on revenue, you strive to improve that without necessarily looking to improve revenue through factors such as improved efficiency, he said. "You've got to improve not just the top line but the bottom line," he said.
Factors such as streamlining back office and administration processes will become more important, as will ensuring you get the best deal from your platform provider - which benefits both the business and its clients, he said.
The shift to an earnings based valuation model is being accelerated by proposed Future of Financial Advice (FOFA) reforms, but it is a process that would have happened eventually anyway, he said.
Whether or not FOFA gets in practices will be valued for intrinsic practices such as their quality of customer relations, and an ability to demonstrate they have a value proposition that the customer likes and is prepared to come back for, he said.
The shift in valuation methods will also impact the decisions of banks in lending to planning practices, he said.
"It's taken years to get specialist teams in banks to understand the principle of revenue multiple, but they understand earnings and are prepared to lend on an earnings basis. It will be the primary driver, if not the exclusive driver, going forward."
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