I met with a group of great up and coming advisers last week.
They spoke about their plans of how they are building their advice businesses. They were eager to understand any ‘rules of thumb’ that might support their efforts to build sustainable and profitable advice firms. Some of the questions we brainstormed were:
- What is the right number of team members for a small firm?
- When do you hire your first team member?
- How do you really know how well you are doing?
- How do you quickly assess another firm as a potential good purchase?
Two of my favourite performance ratios are revenue per team member and revenue per adviser.
Whilst not perfect, these two ratios are quick ready reckoners to help assess the performance of a financial advisory firm. To illustrate how to use these ratios, we discussed a potential purchase that one of the firms was considering to bolt onto her existing business. The firm being considered had a total revenue in the mid-$400,000s, had two staff, both of which were young (i.e. early 30’s) and qualified as advisers (no administration staff members). The seller wanted a premium (in my opinion) of close to 4 times her renewal (trail or on-going) revenue. The seller is recently married and wants to focus on family and reduce her workload back to a couple of days a week.
My first piece of advice regarding business valuations is that a business is worth what someone is prepared to pay for it.
My second piece of advice was to consider my two business performance ratios as potential ‘rules of thumb’ to assess this opportunity.
After 17 years of analysing the productivity of financial advice firms, I rely on a $200,000 per full time team member (regardless of role) as a good rule of thumb if a financial advisory business is productive. One this assessment, this small advisory business is performing, as it only has two full time team members, and the firm is generating mid-$400,000. (Note, this ratio doesn’t tell us anything about the firm’s profitability, only it’s productivity i.e. return on resources).
However, I also use another rule of thumb which is a minimum of $375,000 per full time adviser. With two qualified full-time advisers in this business, this firm isn’t performing as two full time advisers should be generating closer to $750,000 in business turnover. With only two team members, the second adviser is obviously performing more administration than advisory work and in a support role to the primary adviser.
Based on these rules of thumb, is the firm worth the premium of near 4.0 times renewal income?
Without further due diligence, I don’t think so.
There are too many risks attached to justify such a high valuation. There will be a significant integration effort required to re-position the remaining administrative adviser into a more productive advisory role. This effort will be on top of the effort to re-position clients from the winding-down mother-to-be to a new firm. I would consider it, but maybe, based upon these rules of thumb at a lower multiple in the range of 2.5-2.8 times renewal. Maybe.
$200,000 per full time team member and $375,000 per full time adviser aren’t ‘gold’ standards, but they help me with some quick rules of thumb to determine the performance of a business. (By the way, the best practice return per advisers is closer to $750,000 per full time adviser).
If you want to know more about your own ‘performance benchmarks’, for a limited time you can access our Online Dashboard Report by clicking here (for your trial use M1492 username and j29zs73b passwd – leave a comment as to how you go!) – Update: this report is no longer active.
What do you use in terms of rough ‘rules of thumb’ to assess good a advice businesses?