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Top tips on valuing your IFA business today

Photo of Debbie Dry, Head of Integration at Wealth Holdings
Photo of Debbie Dry, Head of Integration at Wealth Holdings

Debbie Dry, Head of Integration at Wealth Holdings (pictured), is one of the UK’s most highly experienced experts when it comes to working on acquisition and integration projects within the IFA and financial planning communities. In this blog for IFA Magazine, Debbie shares her top tips on valuation considerations.

Traditionally, there are several ways a financial advice or planning business can be valued. These include: 

  • A multiple of recurring income

This is the most common method in use in the IFA sector. It is relatively straightforward, a multiple of your recurring income (RI) which should seem easy to identify and calculate? However, there are some complications that as a seller, you should consider when preparing your business for sale. The acquirer will typically only be looking at a contractually-bound recurring income (RI) stream with a provable service history i.e., has the seller delivered the service promised in the signed Terms of Business, be it annual or biannual reviews etc? Other forms of regular income may have a value but could differ from the contractually-bound and proven income stream. 

  • A profit-based multiple (EBITDA)

EBITDA multiples are increasingly being used to value IFA businesses even if the final offer is translated into a RI figure more commonly recognised. The acronym specifically relates to Earnings before Interest, Tax, Depreciation and Amortisation. As a profit figure it is therefore independent of these features – independent of tax, independent of artificial accounting policies that relate to the balance sheet and independent of how the business is funded. We know many smaller practices are owner managed and run accordingly. It is not unusual to see a significant pension contribution being made in the name of the owner and their partner as a fellow director which would not be the case post acquisition. It is therefore important to work with sellers to produce an adjusted EBITDA figure that represents a post-sale EBITDA to understand the true value of a business. 

  • A percentage of assets under advice or management

This is rarely used in IFA practices, being more common in larger fund management businesses where AUM is more of a driver of value. As you can see from my points above, and below, this approach doesn’t allow for the complicated intricacies of valuing IFA businesses.

But these are just the start point of a far more complicated process that requires thought when considering an acquisition or preparing for a sale.

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