Selling your business can be a daunting process and understandably the actual search to find potential buyers interested in your firm can dominate your time and energy.
Initial preparation for a sale should not be underestimated in its importance, as considering the factors that are used in valuing your business can give you a clearer idea of how it will be evaluated by the acquiring firm.
The large majority of businesses are still sold for a multiple of recurring income and some advisers may be concerned about the switch-off of trail commission for platform and corporate pension business in April 2016, which will come into force as a result of the Sunset Clause. Experts suggest that, for some, less than half of their recurring revenue comes from fee-paying clients.
Understandably, there has been concern that a reduction in recurring income will affect the value of a firm when it is to be sold, as it is the dominant metric used in the sale valuation. Also, this concern is in light of the fact that the multiple can usually be enhanced through an effort to maximise recurring income.
However, businesses are not valued on recurring income alone and many pieces of information will be gathered together as part of the buyer’s due diligence process into your firm. The worth of your business will be judged upon the evidence you can show the buyer rather than the impression you give of its worth. The necessity for accurate record-keeping should not be overlooked and so you must ensure account information, projections and synopsis of clients are all clear and up to date.
Initial information you might expect the buyer to want to see, not in detail at this stage if a confidentiality agreement has not been signed yet, includes:
• Fee base retained after three years
• Number of existing clients
• Cost of fee base per calculations
• The percentage of your fee increases implemented over three years
• Additional services provided to these clients annually
• New clients referred over three years and client retention
• Regulatory history
• Total gross revenues of the firm after three years
• Net cost per £1 revenue based on cost of fee base
Clearly the focus here is on the quality of the client pool and insight into the value of your fee base. Ongoing client charges is one factor that will influence the valuation of your business. For example, pointing out that your fee is 0.5 per cent, planting the idea of the scope for a hike to the buyer themselves and explaining how recurring income could be doubled by an increase in the client charge to 1 per cent. Such a projection could be shown to be included in a valuation.
The quality of client relationships is another way your business will be valued in a sale process. As a result of the shift to a fee-based world, we have seen that some businesses have targeted higher net- worth clients to increase the value of their client bank and consequently the multiple for which they can sell their business for. This is where client segmentation data becomes important, as going beyond basic client information will help you show the percentage of clients that fit into the higher net-worth bracket for example.
