A financial planning practice can have a substantial client base and strong recurring revenue, yet produce less profit than an owner expects. One reason is the cost of delivering the services attached to that revenue.
When assessing value, it helps to look beyond what clients pay and examine the work required to serve them. Some clients may need extensive adviser time, regular reviews and support from several team members. Others may be served efficiently through established processes. Similar annual fees do not necessarily produce similar earnings.
Consider two practices with the same recurring revenue. One has service arrangements that are clearly defined and delivered efficiently by its team. The other requires significant adviser involvement to meet client needs, while its fees have not kept pace with the work being done. The revenue figures may match, but the profit available to a future owner could differ.
A valuation therefore needs to consider both the income from the client base and the costs required to maintain it. Staffing, adviser capacity, administration and the time spent on each service arrangement all contribute to the picture. A buyer may examine whether the current level of service can continue with the existing team and cost structure.
Client mix can be important here. A practice may have a large number of clients on modest fees, a smaller group requiring highly involved advice, or a combination of both. None of these arrangements is inherently better. What matters for valuation is whether the fees support the work required and whether the resulting earnings are likely to continue.
Good records can make that easier to understand. When the practice can identify what services clients receive, how those services are delivered and what they cost, an owner has a clearer view of the profitability behind recurring revenue. That information may also reveal where the practice has capacity to grow and where additional clients would require more staff.
Owners sometimes focus on increasing revenue when they want to build value. That may help, but growth is only part of the equation. If each additional client requires more time and cost than their fees support, the increase in revenue may have a smaller effect on value than expected.
An appraisal can help start the broader conversation about what the practice earns and what influences those earnings. BCI Business Brokers’ tool provides an indicative value range based on the information submitted, which is reviewed by an experienced broker.
If you know your practice’s recurring revenue, the next question is how much it costs to keep earning it.
Click here: https://freeappraisal.valueabusiness.com.au/
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Regards,
Tony Arena