How much is your IFA business really worth?

This article first appeared in Professional Adviser.

A lot of factors contribute to the value of a financial advice business. I take a look at some of the most important elements, including succession planning, liabilities and quality of data…


If you’re an adviser thinking about selling your business, then you’ve probably been pondering how much it’s worth.

The age-old way of valuing an IFA firm is based on recurring income – typically between two to four times the annual amount – but there are major flaws in this rule of thumb in today’s market.

With the average age of advisers in the UK continuing to rise, selling to an adviser partnership, consolidator, or aggregator has become a key means of allowing business owners to retire and realise value in firms they have worked to build up over many years.

While a calculation based on recurring income might show what’s being brought in from existing clients, it does little to demonstrate the future growth potential of a business, which is what any savvy acquirer will be looking for.

What’s more, we’re hearing of more and more IFAs being drawn in by firms quoting hugely attractive initial valuations based on recurring income, only to be paid out much less when it comes to signing on the dotted line.

This lack of transparency among a few firms presents a whole other issue, but serves a need to establish a more realistic standard for IFAs to value their own firm – such as the EBIT, or adjusted EBIT model – to ensure they are equipped with the knowledge to secure the best deal with a buyer.

It is also essential to understand how the acquirer defines adjusted EBIT. What costs are included or excluded when quantifying the real underlying profitability?

Aside from this, there are numerous lesser-known factors that will impact the final amount an acquirer is prepared to offer. Business owners should be taking these into account before even entering a conversation about a potential sale.

Quality of data

If your data isn’t up to scratch, then you may well be looking at around a 25% reduction in the ranges of what a buyer is prepared to offer.

You simply cannot present your business in the best possible light without strong data around it: this is the only way you can demonstrate the profile of your clients and the ‘stickability’ of your firm’s assets and revenue.

This applies to all aspects of the business, including being able to demonstrate progression of new business and growth potential. For example, can you show where new business comes from? If it comes through client recommendations or third parties and professional connections, you need to show how this is tracked and measured.

Succession planning

Ultimately you want to be able to show that your business can run – and keep thriving – without you. If you can do this, then you’re already ahead of the game.

Look at it from the acquirer’s point of view: do clients have a relationship with the business as a whole, or is it largely with one individual?

Aside from being able to show that clients have multiple contact points with other people in the business – from administrators to paraplanners etc. – the aim is to demonstrate that you have named successors in place, with the potential to keep building that wider relationship with your brand and keep it growing over the long-term.

If you don’t have that infrastructure available, then you will need to be realistic in terms of what that means. Are you prepared to accept a 25% reduction for an immediate cash sale, or would you prefer to go for a phased sale and stick around to manage the transition phase?

Liability considerations

It goes without saying that an acquirer will want to de-risk as much as they can, so another consideration is whether or not you will just sell the goodwill of your business or the company and equity as a whole.

Selling just the goodwill (client data, contracts, recurring income etc.) essentially means retaining the liability of past business undertaken. Sellers prepared to maintain liability send a clear signal that they are confident that the business is sound enough to warrant minimal complaints, which can help you attract a more competitive price. A word of caution though, the regulator has the power to ‘see through’ a transaction and decide where it sees the liability resting. A consideration which is equally important for both seller and buyer.

Understandably, a lot of sellers want to relinquish all liability and simply walk away with an equity payment, though it is rare that the seller wouldn’t insist on indemnities and warranties.

While some of the above factors are easier to analyse than others, and every buyer will prioritise some more than others, being aware of how each could impact a valuation will place you in far stronger stead to secure the most competitive deal.