Introducing clients’ children into occasional meetings is the sort of thing we recommend as a minimum, however any inroads into signing up children and grandchildren as clients would have a genuine impact on rebalancing the age profile of your client book.
Profitability
While recurring income is still the most common method of valuing businesses, with 70 per cent of offers analysed in the past 18 months following this approach, buyers are looking to profit more and more, either as a core valuation approach or to validate a recurring income approach.
Acquirers are looking to buy businesses where there is a proven minimum level of sustainable profit but where there is still potential to provide efficiency savings.
A buyer would typically adjust the cost base to reflect any integration into their business, adding back things like directors’ salaries and pension contributions, but also applying market-rate adviser costs (circa 30 per cent of revenue) – this process is called normalising.
Simply put, the bigger the profit quantum, the more attractive that business is likely to be in the market, with a particular demand currently for businesses with more than £500,000 of normalised profit.
A business presenting with net profit at around 15 per cent of turnover would suggest that current costs are too high and, while significant savings for a buyer are likely to be possible, the purchase price would be adversely affected.
A business coming to market with a net profit margin more than 50 per cent is unlikely to be sustainable in a larger organisation and there is unlikely to be additional value that can be added by the buyer.
While the profit will, on the surface, seem attractive, it is likely that this is due to a unique factor within the business that is not sustainable and the normalising process will likely bring the margin down.
In the years preceding a sale, it is sensible to start analysing your profitability. Do you have a long list of small clients who are taking significant time for little profit? When was the last time you reviewed your supplier base to understand if you need and use them all effectively?
We would recommend sustaining profitability at around 25 per cent to 40 per cent for a period of at least two years. This will demonstrate consistency as well as ensuring there is scope to add value by centralising certain costs.
Clean, simple business
It is essential you can articulate your service offering, so the simpler it is the easier that is to achieve.
This covers client charging structures, compliance regime and investment approach. The more streamlined the business the easier it is to assess risk factors such as advice liability and the simpler it will be to integrate post-sale.
