Fees and Firm Value: What Else Affects What Your Business Is Worth
Earlier this month we launched our Fee Value Calculator. If you have not tried it yet, it takes around 90 seconds and gives you an indicative view of how a fee change could affect firm value.
We have had a lot of people use it this month and the response has been pretty consistent. The number surprises people.
For example, a firm generating £3m in recurring income at a 0.75% ongoing charge could generate an additional £400,000 a year by moving to 0.85%. At a 3.75x multiple, that represents a potential £1.5m uplift in indicative firm value.
Seeing the figures in pounds rather than percentages can change how a fee review is viewed.
The calculator looks at one part of firm value. Buyers will consider much more than the fee percentage.
What buyers look at beyond the fee
Buyers will start with the headline figures: revenue, AUA, recurring income and margin. They will then look at what sits behind those figures, including the quality of the income, client relationships, owner dependency and how the business operates.
These are some of the areas that can influence how a buyer assesses the firm.
Income quality and concentration
Buyers will look at the amount of recurring income, how it is priced and how concentrated it is across the client bank. They will factor the concentration risk into how they structure the deal, and what they are prepared to pay.
The same applies to how the income is priced. Recurring revenue that has not been reviewed in years, that no longer reflects the cost of delivery, or that is inconsistently priced across the client bank is harder to value with confidence. That uncertainty can affect both valuation and deal structure.
Client transferability
The value of recurring income depends partly on whether it is likely to continue after completion.
Client retention will therefore be closely linked to where those relationships sit within the firm.
In a lot of financial planning firms, the key relationships sit with the founder. In owner-led firms, some clients may have a much stronger relationship with the founder than with the wider business.
They will want to understand what happens to those relationships when the founder steps back. If the honest answer is that nobody really knows, that uncertainty will be reflected in the offer, either in the headline figure or in how the deal is structured, with earn-outs and retention clauses that shift the risk back to the seller.
Strong client transferability is usually built over time. Senior advisers hold client relationships in their own right. The team has genuine connections across the client bank. Planned handovers have happened gradually, not rushed in the final months before a sale.
Building those relationships takes time, so planned handovers should begin well before a sale.
Owner dependency
A firm may have strong income, loyal clients and a capable team, while still relying heavily on the owner for key decisions and relationships.
That person is usually the one trying to sell.
Owner dependency affects value in two ways. First, it raises questions about whether the income will hold up after the sale, which connects directly to client transferability. Second, it raises questions about whether the business can function without the seller, which affects how buyers think about integration, retention and risk.
A firm that can operate without constant owner involvement gives a buyer less to worry about. Decisions sit with the leadership team, clients know other people in the business and key processes are documented. That can reduce some of the risk a buyer needs to account for in the valuation and deal structure.
We wrote about the leadership shift required to get there in Why You’re the Problem: How to Build a Leadership Team That Runs Without You. If owner dependency is something you recognise in your own firm, that piece is worth reading now.
Owner dependency will be our focus in September, including how to reduce it well before an exit.
Process and documentation
Clear documentation makes it easier for a buyer to understand how the firm operates without relying on individual knowledge.
That includes clear service tiers, documented processes, clean client data and a compliance record that stands up to due diligence. Together, they help show that the business can continue to operate after completion without relying on individual members of the team.
A firm that runs on the memory and judgement of its key people creates uncertainty. Where key information sits in people’s heads rather than in documented processes, a buyer has more operational risk to account for.
We looked at what due diligence actually examines, and how to make sure your firm stands up to it, in Survive Due Diligence When Selling Your Business.
The timing question
None of this gets built in the months before a sale.
Firms that are well prepared for sale have usually been strengthening these areas for years, rather than trying to address them once a buyer is already involved.
They may not have known exactly when they would sell, but the changes made the business less dependent on the owner and easier for a future buyer to understand. The result is a firm with less owner dependency, transferable client relationships, clearer processes and better-quality data.
Those changes can also make the firm easier to run before any sale takes place.
If you are starting to think about future firm value, reviewing your fees is one practical place to start. The calculator can give you an indicative view of the potential impact.
Fees are only one part of the picture. We help firm owners understand the wider factors that could strengthen or reduce value before they go to market.
If you are thinking of selling in the next three years, you may already be behind. This piece is worth reading alongside today’s article.
If you want to understand where your firm stands and what you could address before a future sale, speak to Melo.
📞 0113 4656 111 📧 hello@melo.co.uk
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