What is a business valuation?

A business valuation estimates the economic value of your financial planning business to an external party. In financial planning valuations, you often hear about recurring revenue multiples, however, these are not usually appropriate, and instead we consider the profitability, quality of the clients, location, and other key risk measures including key person risk. This is because the economic investor bases their value on the return on their investment – the profit.

In financial planning businesses, there are plenty of reasons you might need a valuation including:

  • Selling or buying shares in the business
  • Business planning
  • Retirement planning
  • Valuing matrimonial assets
  • Shareholders agreements
  • Buy/Sell Insurance
  • Obtaining finance
  • Estate planning
  • Financial reporting

The purpose of the valuation can impact the way the valuation is conducted, however, on the whole small and medium enterprises must consider their ongoing profitability. This profitability is adjusted for any once off or non-ongoing items such as staff that are no longer working at the business, or additional staff resources, the run rate of revenue is considered, and any personal expenditure is added back.

Dealing with a business valuation expert who understands your industry is critical to determining an appropriate value on your business. If the rule of thumb, recurring revenue valuation methodology, is used it fails to consider the costs of the business, and in smaller businesses (less than 1.5 million in turnover), it can materially overvalue the business. Conversely, if the business is larger in size, or has above average profitability at a small scale, the rule of thumb can undervalue the business.

Understanding the industry, participating in market transactions and our relationship with fellow brokers, allows us to provide you real insights into the industry and how your business compares.

If you would like to understand how a business valuation can help you in your financial planning business, contact us for a free discovery call.

About the Author
Fiona Ettles , Hobart
Fiona is enthusiastic about informing and reassuring clients of their financial position, be it in regard to the value of their businesses, or their tax returns. She enjoys working with clients to understand their problems, consider solutions and implement plans to better their lives, whether this be in the short or long term.
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