Valuation for Financial Planners – not all revenue is created equal

I have seen multiple examples of business owners electing to walk away from their businesses and close the doors. This is the worst possible way to extract value from the business. If you have enlisted the help of a financial planner, ensure they are factoring risk and business performance into their business valuations.

Many financial planners are still living back in the days when a multiple of revenue was the industry standard and businesses were valued, financed and sold on this basis. This is no longer the case and hasn’t been the case in most businesses for a long time, if ever. Multiples of revenue do not reflect risk or underlying performance. Two businesses can both turnover $1mil; one can make money (profit), be well managed, mitigate risk and build a sustainable business. While the other can lose $100k per year, be very inefficient, poorly run and covered in risk – they cannot possibly be valued at the same amount!

In many financial planning firms, there are specific risks which are not being covered and are not included in valuations. For example, the new rules cover client reviews – how often are they performed? If a planner has clients who haven’t been reviewed for greater than 24 months this is very risky revenue and this cannot be included in the valuation. If you take this revenue out (or at least discount it substantially) is this business still profitable? If you look to raise pricing/fees to cover the cost of delivering reviews – will the clients stay?

Planners cannot afford to ignore the valuation issues arising, but they should also be seen as an opportunity. Changing business process, systems, client engagement and financial models should make for a more profitable, resilient and valuable business.

For a business valuation that factors in risk and business performance (the true value of your business), get in touch with one of our Accredited Advisers today.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.