Factors that can influence the financial value of your business
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Now that we’ve discussed issues related to strategy, process, compliance and customer segmentation, it’s time to turn our attention to the topic of valuation in succession planning.
I’m sure you’ve already heard of some of the models used to value a book of business based on its size and recurring revenue, so I won’t dwell on those points here. In reality, every situation is unique and putting a percentage or dollar amount on the value of a book of business is no simple task, especially for financial advisors who aren’t specialized in business valuation.
Additionally, leaders who have dedicated years of their life to their work and clientele often overestimate the true value of their business. Getting assistance from an advisor or independent appraiser can help them stay as objective as possible.
Their advisor can also help them increase the value of their book of business by drawing their attention to certain factors which they have a degree of control over. The table below groups these factors into three categories: operations, clients and transaction:
Category | Factor | Increases value | Decreases value |
OPERATIONS | Adherence to compliance rules | Successful audit, no follow-up required | Audit identifies multiple areas for improvement |
Needs analysis | Up to date on most records | Not systematically carried out | |
Organization of procedures | Well organized | Poorly organized | |
Use of digital technology | Frequent (CRM, paperless records, electronic signature, virtual meetings, etc.) | Very minimal | |
Number of financial institutions used | Limited | Numerous | |
Formation of the book of business | Primarily by the financial advisor selling the business | Combination of several books from multiple advisors | |
Business over the last 5 years | Stable and growing | Irregular and/or declining | |
Types of sales | New/non-replacement | Frequent replacements of existing contracts | |
Retention rate for contracts sold | Near 100% | Under 60% | |
CLIENTS | Number of clients | Less than 500 families | Plus de 500 familles |
Age of clients | Generally younger | Generally older | |
Frequency of contact with clients | Regular | Sporadic and unsystematic | |
Geographical concentration | Highly concentrated (e.g., Island of Montreal) | Very spread out | |
Segmentation of client groups | Few distinct groups | Spread across many different groups | |
TRANSACTION | Brand and value of service | Clear and communicated to the client | Non existante |
Professional reputation of the buyer and seller | Good | Poor or unknown | |
Seller’s attitude | Ready to step down | Forced to step down | |
Buyer’s attitude | Understanding and ready to buy | No interest in collaboration | |
Clients’ knowledge of the transfer | Informed in advance | Surprised by the decision | |
Future sales potential | Easy to identify | Very hard or impossible to evaluate | |
Type of transfer agreement | Clear and in writing (retention clause, value adjustment, etc.) | Vague verbal agreement |
One thing is for sure: greater cooperation by advisors in the transition process generally leads to higher sale prices. The opposite is also true: the less the seller cooperates, the lower the price they’ll get. However, striking the right balance between involvement and distance from operations is hard to plan for in advance, and even harder to implement in practice.
It’s also important to recognize the need for more transparency around succession planning for advisors. For various reasons, it’s not always easy to get information within your own brokerage firm, and the fierce competition between players isn’t a great help in this regard. Thankfully, the topic of succession planning has been addressed in numerous books, conferences and research projects, so don’t hesitate to draw inspiration from other sectors. For example, have a look at the various documents prepared by the Business Development Bank of Canada. I also recommend the book (in French) L’après Inc., Vivre sa sortie entrepreneuriale positivement.
The final article in this series will be entitled “Is there such a thing as a perfect match?”.
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