Profit trumps EBIT in financial planning practice sales
The earnings before interest and taxes (EBIT) multiple buyers are willing to pay for financial planning firms have fallen significantly, with profitability now a more important criteria, according to business brokers, Radar Results.
In an analysis of current market conditions, Radar Results principal John Birt said the EBIT multiple currently being paid for quality financial planning businesses had fallen significantly and was probably sitting at around four to six times.
He said that in these circumstances, there should be more emphasis on the profitability of a practice rather than the multiple.
Birt's analysis said larger practices (with revenue in excess of $1.5m) would usually sell on a multiple of EBIT and the highest EBIT within the analysis, as a percentage of revenue, was 59 per cent, with the average being 33 per cent.
"If you can improve the profitability of a practice, then the sale value of that practice today could quite conceivably be the same as it was several years ago; albeit with the multiple falling," he said.
Birt said that there was often too much emphasis on the multiple factor when a practice decided to sell or merge; whereas planners should be looking at the profitability of the practice and, consequently, the value it could add to another practice after it was merged.
"Clearly, savings on infrastructure costs such as leasing, staff and software can add significant additional profit and, later on, make the new, larger business more attractive as a potential acquisition," he said.
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