Valuing a Business
In an increasingly consolidated financial advisory market it is not uncommon for principals/advisers to bear constant consideration to the valuation of their business and how they can increase that value.
There are of course many differences between valuing an advisory business and how my team would approach valuing a growing business for investment via an EIS/SEIS portfolio. However, there are some simple lessons from my team that may be useful for advisory businesses to consider.
It is likely that an advisory business being sold will be predominantly valued on their financials. This may include recurring revenue, demonstrable regular new business inflows or EBITDA. Such valuation methods are appropriate for this market but for the investments we make (predominantly in growing technology, life sciences and renewable energy companies) such retrospective valuations would be entirely inappropriate as such small companies are unlikely to yet be generating profit and in some cases, particularly when looking at Seed Enterprise Investment Scheme investments, may not even yet be generating commercial revenue. Valuation of such businesses is therefore based on projected growth, market opportunity and potential value of any protected intellectual property or assets.
Enough of the differences, what about the similarities?
Some appealing points for any investor include well-manged accounts, accurate data management, a clear business plan and proposition, demonstrable key relationships and unique selling points.
Any investor looking at a business will want to understand the company, who the client base is and what the business has done to date. Being able to clearly narrate this to an investor is vitally important and the better the data management and record-keeping, the easier it is for an investor to make a decision. For an FCA authorised firm it could also be important that all compliance and suitability records are well maintained.
You would not believe the number of companies that approach my team requesting not-insignificant sums of investment and yet have no written business plan. Business plans usually evolve and it is important that business owners regularly revisit their business plan to ensure that it is up to date and accurately highlights their progress to date and future ambitions. Although an investor is looking for a positive future plan, it is also worth clarifying that a business plan should be based on realism and those which show genuine pragmatism are likely to engender trust from the investor. Overinflated forecasts can be a sure-fire way to create mistrust between investor and business owner, which is never a good way to start a relationship.
We are all guilty of occasionally name-dropping or exaggerating relationships, but if a business is reliant on the strengths of such relationships then it is important to be accurate as to what those relationships actually are. For a financial adviser this may be a professional connection referring business of for a seed-stage company it may be a co-marketing agreement or such like. An acquirer/investor will likely want to ensure these relationships continue and bring in ongoing levels of business. Such relationships are only likely to add value to a business if there is a written agreement in place. The old adage that “if it isn’t written down then it hasn’t happened” is certainly true and investors tend not to invest based on anecdotal say-so.
When we consider investment in a young business, a key criterion is how disruptive that innovation is to an existing market or whether a new market is being created. Advisory businesses may well be innovative and service their clients in a unique way, either by a unique service proposition, a specific investment style or a tech based innovation. An acquirer may be interested in adopting or expanding this service themselves and this in turn could have a positive impact on valuation.
An often under-discussed consideration is that of doing business with the right people. My team freely admits that they have previously walked away from appealing investment opportunities as they have not felt the relationship with the directors is what it should be. When forming a commercial relationship it is important that the relationship works on an interpersonal basis, as well as on a spreadsheet. If a relationship does not feel right at the outset then it is unlikely to be a positive environment in the future, particularly when any inevitable tough times come.
In summary, any advisory business owners seeking investment or looking to sell should ensure that they have their record-keeping up to date and in a user-friendly format. They should also have a clear business plan which shows how they have progressed to date and how they the company is expected to grow in the future. Try and pre-empt questions the investor/acquirer may have so there isn’t a complex and time-consuming exchange of queries and answers.
How well a company is prepared, and the professionalism of their approach to seeking investment (or a sale), will be judged and will have a bearing, however small, on the appeal of that investment. This ultimately could affect the valuation, so if in doubt it could be worth seeking professional assistance.
The financial advisory consolidation market is now a mature market with various models for advisory business principals to consider. The most important things are to be prepared and to find the model and people that works best for you.
Ian Warwick is Managing Partner at Deepbridge Capital LLP