Title: Fair Market Value Inc. presents Valuation of A Financial Advisory Practice
1Fair Market Value Inc. presentsValuation of A
Financial Advisory Practice
- Presented by Darren Miles, CBV
- June 4, 2009
Distributors Summit 2009
2Fair Market Value
- The highest price available, in an open and
unrestricted market, between informed and prudent
parties, acting at arms length, under no
compulsion to act, expressed in terms of money or
moneys worth.
Distributors Summit 2009
3Fair Market Value
- Highest Price Available
- Open and Unrestricted Market
- Informed and Prudent Parties
- Acting at Arms Length
- Under no Compulsion to Act
- Money or Moneys Worth
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4Discount/Capitalization Rate
- Importance
- Single most important factor
- Area that focuses on risk tied to investment
- Inverse of a multiple i.e. 25 rate 4x multiple
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5Discounted Cash Flow Technique
- Preferred method in current environment
- Comment Capitalization of discretionary cash
flow - Forward Looking
- Assumptions Professional Practices
- Purification
- Receivables
- Debt
- Normalization of Statements
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6Discounted Cash Flow Technique
- Buyer Beware - Overly Aggressive Projections
- Market Remuneration
- Discount Rate vs. Capitalization Rate
- Terminal Value
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7Market Comparison Approach
- Use of public market multiples to subject
- Requires adjustments for differences
- Price to Earnings Multiple
- Price to Revenue Multiple
- Various industry specific others (i.e. AUM)
- Issues with the Market Approach
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8Tying it all together
- Weighting (historically)
- Capitalization of discretionary Cash Flow Not
Applicable in current environment - Discounted Cash Flow 90
- Market Comparative 10
- Debt Retirement Analysis
- Cash Flow
- Target between 5 to 10 years depending on the
industry - Ideally have a buffer cash flow position
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9Incorporation
- MFDA Rule 2.4.1
- Suspension of rule extended to March 31, 2010
- Provinces approving extension include British
Columbia, Saskatchewan, Manitoba, Ontario, New
Brunswick and Nova Scotia. - IDA advisors are not allowed to incorporate under
current regulations.
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10Benefits Of Incorporation
- Sale of Assets vs. Shares
- 750,000 capital gains exemption
- Application of lower taxation rate for valuation
- Greater after tax dollars to pay down debt
principal after acquisition - Section 85 Rollover must be executed properly
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11Current Environment
- Historical analysis less reliable
- DCF has become the method of choice
- Projections under greater scrutiny
- Higher risk factors (cap rate) due to uncertainty
- Buyer / Seller Ratio
- Current breakdown in this market
- Discounted Cash Flow 90
- Market Approach 10
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12- Valuation Issues Specific to Advisory Practices
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13Typical Valuation Misconceptions
- Todays Rules of Thumb for valuing your
business - Very large range of multiples and rules of thumb
- Executed 2-3 months prior to expected sale date
- Based on AUM, revenue or earnings
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14A Closer Look at Rule of Thumb Valuation Models
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15A Baseless Estimate
- Using the standard Rules of Thumb
- Assumes that all advisor firms are equal
- Produces wide ranges margin for error
- Does not take into consideration that practices
are much more complex than AUM, Revenue and
Earnings - Will sell yourself short
- Provides no logical basis for value conclusion
- Using standard Rules of Thumb could result in a
huge risk of over / under payment
Distributors Summit 2009
16What About YOUR Value?
- Understand the value YOU have in your Business
BEFORE you sell it! - Rule of Thumb approaches have NO rationale
behind them - The financial industry will eventually come in
line with proper valuation metrics - Due diligence aims to answer the buyers questions
before they are asked
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17Impact of Value on Your Business
- The valuation of an advisory practice is similar
to the valuation of any service-based company.
Goodwill represents the greatest portion of value
within such a company, due to the lack of
significant tangible assets. Goodwill is not
based on revenue levels so much as its based on
the resultant earnings and qualitative aspects of
those earnings, such as its consistency and
sustainability, which is driven by the strength
of the underlying client relationships coupled
with a recurring and predictable fee structure. -
-
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18Understanding the 3 Critical Thresholds
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195 Factors for an Optimal Valuation
- Lead time 5 to 10 years
- Think of your business as a business vs. a
book - Understand critical thresholds 300,000, 2
million, 5 million - Implement process / structure and document
- Move to recurring revenue
- By understanding what your Valuation is and
having it documented, you can limit negotiation
with potential buyers when discussing what your
practice is worth.
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20Capitalization Rate Factors Considered
- Risk free rate of return (yield on a 10 year
government bond) - Recurring to non recurring revenue ratio
- Product mix
- Client age
- Fee based vs. transaction based
- Number of clients
- Continuity of business
- Number and tenure of employees
- Institutionalization of the business
- Earnings growth and stability
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21Transferable Value 4 Areas of Impact
- Other than the financials, there are 4 areas
within your practice that can provide the
greatest impact on your business valuation - Sales and Marketing Process
- Overall Business and Operations
- Compliance
- Documents and Files
- Institutionalizing or focusing on improving
these areas provides greater Franchise Value
which is transferable during the business
succession process.
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22Specifics of Institutionalization
Institutionalizing or improving these areas can
positively impact the Cap Rate which is used to
determine your business Franchise Value
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23A Before and After Case Study Building a
Business vs. a Book
- After Addressing Key Concerns
- built practice over 27 years, AUM 100 M
- 215 clients avg. age 46, avg. assets
761,000 each, half with estate plan in place - knows children/beneficiaries of clients to align
himself with eventual wealth transfer - primarily recommends fee-based products
derives recurring revenue of 112 bps - steady profit margin consistently growing
revenue firm grip on expenses - systematic client service model
- instituted sales and operational systems
trained staff to handle day to day operations
keeps diligent records - compliance regimen is up to date and
communicated to all employees
- Original Story
- in business for 23 years, AUM 100 M
- 1000 clients avg. age 42, avg. assets 100,000
each - wide variety of individual securities and MF
which means her average turn ratio of 88 bps can
be volatile - considerable client service pressure due to of
clients with unique portfolios - marginal increase in cash flow due to client base
and no system in place to manage this process - lack of time driven by heavy client base, results
in lax compliance and uninformed employees about
latest developments
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24A Before and After Case Study Scorecard
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25A Before and After Case Study Scorecard
A move to higher, recurring revenues coupled with
a 5 reduction in risk levels can translate into
more than 500,000
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26Contact Information
- For further information please contact
- Darren Miles at
- 604-637-3898 - Vancouver
- 905-315-5054 - Burlington
- 416-238-2229 - Toronto
- 514-904-4045 - Montreal
- darren_at_fmvi.ca
- Thank you for your time and have a great day.
Distributors Summit 2009