Falling revenues fail to dent firm value
There has been no softening in the market value of quality advice firms despite falling revenues in a number of firms over the past 12 months, according to the director of consultant Centurion Market Makers, Chris Wrightson.
Quality advice firms are still attracting a premium, with multiples of four to eight times normalised earnings before interest and taxes (EBIT) for top end businesses and 2.75 to 3.5 times recurrent revenue for smaller businesses.
“With revenues down in the current investment environment, the business value of firms (based on revenues) is less than 12 months ago — yet multiples aren’t softening,” he said.
Practices are valued on a multiple of EBIT or recurrent revenue, with firms having a recurrent revenue of $2 million plus more likely to be valued on an EBIT multiple.
Rather than a change in business value, Wrightson said the current economic environment is causing a change in the shape of the terms of transaction of sales.
“With most of our current transactions the buyer has clauses to protect loss of clients or revenue while the seller is asking for a share of any recovery that drives the revenue line,” Wrightson said.
“This means as revenues rise, a seller can lock in additional capital payments, which can equate to a sale price achievable in more robust times.”
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