Practice Valuation for
Practice Valuation for: Advisor Sample
Practice Valuation by Key Management Group
Our Practice Valuation and Consulting service provides you with accurate and meaningful information to guide you in succession planning, practice acquisitions, and equity management.
Our Approach
Unique Methodology
Individualized Service
We provide a unique combination of real life
We deliver a valuation that integrates the
Consulting is part of every valuation that we
experience, traditional M&A principals, and
industry specific “market” based valuation
deliver - we go deeper than the numbers in
industry specific market knowledge. In
with the more established M&A practice of
the analysis. Our process includes a focus on
addition, our analysis is provided within the
using a “discounted cash flow” method. The
the “non-price” factors that can greatly
context of a consulting relationship.
integration of the two methods balances the
influence the success of a deal
views of buyer and seller
Benefits Information and advice you can trust to make “game changing” decisions
Value accuracy resulting from our integrated dual valuation methodology
Practice Valuation by Key Management Group
A better understanding of all the factors that make your deal successful
It is important that you have a general understanding of our valuation methodology to get the maximum value from this analysis. A detailed review will take place during our phone consultation.
Valuation Methodology Our valuation methodology is unique in that it utilizes the commonly used financial services industry standard “market approach” with a more established mergers and acquisition “income approach” (discounted cash flow). By establishing a value based upon the average of the two methods, you can be assured that the value is a fair representation of the true value. Market Approach Method Our market based valuation methodology looks at the ratio of recurring and non-recurring revenue. Recurring revenue multiples increase as the ratio of recurring to non-recurring revenue increases. Non-recurring revenue multiples are based on how long it takes to access or re-position the assets that are currently not generating recurring revenue. These, and other, ratios are used to determine comparable value of current market prices. Income Approach Method Our discounted cash flow methodology uses a discount or “hurdle” rate by combining a risk free return rate of return (U.S. Treasury Bills) and an industry specific liquidity risk factor. By using a net revenue (after operating expenses) benchmark, our analysis provides you with a solid cash flow based valuation (Net Present Value).
Practice Valuation by Key Management Group
Your Practice Valuation
Valuation Summary November 11th, 2014 Based on the currently available data, it is my opinion that the fair market value of this book of business is:
*$2,513,174 Todd Doherty
Todd Doherty Mergers and Acquisitions Specialist Key Management Group
*The summary value is based on “common” terms currently being used in financial practice acquisitions (25% down with the balance due on a 60 month note)
Practice Valuation by Key Management Group
PRACTICE DATA Advisor Name Total GDC Current 26 PD Transaction Based Revenue % Transaction Based Revenue
Sample $1,295,180 19% $223,937
Date
1/24/14
Assets Under Management
$171,281,000
Payout %
91%
Post Payout GDC (Revenue)
$1,178,614
Recurring Revenue %
81%
Asset Velocity
Recurring Revenue
$954,677
Value Impact of Asset Velocity
0.76 Positive
3 YEAR TERM Transaction Revenue Multiple Growth Rate
0.60 10.00%
Recurring Revenue Multiple Discount Rate
2.35 18.00%
Reference Value Down Payment %
25%
Down Payment
Annual Interest Rate
5%
Payments Per Year
4
3
Principal & Interest
$1,725,168
Term in Years
$530,935.41
Multiple Based Valuation
$2,377,853
Discounted Cash Flow Valuation
$1,869,630
Mixed Average Valuation
$2,123,742
Note Carried By Seller
$1,592,806
Scheduled Payment Amount
$143,764
Total Economic Value
$2,256,103
Multiple Based Valuation
$2,586,763
Discounted Cash Flow Valuation
$2,439,585
Mixed Average Valuation
$2,513,174
Note Carried By Seller
$1,884,880
*5 YEAR TERM Transaction Revenue Multiple Growth Rate
1.00 10.00%
Recurring Revenue Multiple Discount Rate
2.48 18.00%
Reference Value Down Payment %
25%
Down Payment
Annual Interest Rate
5%
Payments Per Year
4
5
Principal & Interest
$2,141,993
Term in Years
Practice Valuation by Key Management Group
$628,293.47
Scheduled Payment Amount Total Economic Value
$107,100 $2,770,286
Benchmark Data Risk Factors Client Decile Top 10% 2nd 10% 3rd 10% 4th 10% 5th 10% 6th 10% 7th 10% 8th 10% 9th 10% 10th 10%
Average Client Age Compared to Benchmark Sample Benchmark Difference 64 65.09 -1.09 62 63.79 -1.79 61 62.79 -1.79 60 62.28 -2.28 60 60.80 -0.80 59 59.65 -0.65 58 57.72 0.28 57 55.68 1.32 52 52.16 -0.16 53 53.56 -0.56 Client Group Metrics
Year to Date Net Flows 26 Service Period GDC Growth Rate Lost Client Groups (26 SP VS Previous 26 SP) % of Client Groups with a 26 SP Plan % of High Value Client Groups with a 26 SP Plan Asset Velocity (Return on Assets)
Length of Relationship in Years Compared to Benchmark Sample Benchmark Difference 11 15.03 -4.03 10 14.89 -4.89 8 14.00 -6.00 9 14.65 -5.65 8 14.00 -6.00 9 13.54 -4.54 9 13.28 -4.28 11 12.47 -1.47 8 10.62 -2.62 8 10.31 -2.31
% of Total TOS GDC Compared to Benchmark Sample Benchmark Difference 38.20 41.40 -3.20 17.10 19.24 -2.14 13.80 13.02 0.78 10.40 8.38 2.02 6.70 6.16 0.54 5.00 4.16 0.84 3.70 2.60 1.10 2.20 1.73 0.47 1.10 1.36 -0.26 1.80 1.75 0.05
Client Group Metrics Compared to Benchmark Sample Benchmark Difference $4,913,400 $1,914,991 156.58% 62.00% 17.11% 262.41% 68.00% -39.15% 273.67% 42.00% 20.77% 102.21% 63.00% 29.57% 113.07% 0.76 0.80 -4.23%
Risk Special Notes
Decile Groupings
Client Group
Risk Evaluation Buyers of financial-advisory practices should evaluate risk carefully to determine whether it is justified by the anticipated reward. While there are certainly a number of metrics and operational practices that represent areas of potential risk, the metrics measured above are common in due diligence. The weight given to a specific risk factor will vary from buyer to buyer, depending on their ability to address it.
Practice Valuation by Key Management Group
Benchmark Data Growth Factors Client Group Metrics
High Value Client Groups HVC Ratio (# of HVC compared to total # of clients) Average Client Group GDC Average High Value Client Group GDC Average Client Group AUM 26 Service Period GDC Growth Rate % of Client Groups with a 26 SP Plan % of High Value Client Groups with a 26 SP Plan Asset Velocity (Return on Assets) Payout Rate
Client Group Metrics Compared to Benchmark Sample Benchmark Difference 252 126 126 47.46% 50.35% -5.74% $1,733 $1,960 -11.60% $3,195 $3,283 -2.67% $177,906 $251,997 -29.40% 62.00% 17.11% 262.41% 42.00% 20.77% 102.21% 63.00% 29.57% 113.07% 0.76 0.80 -0.04 91.00% 85.00% 7.06%
Growth Special Notes
Client Group
Growth Evaluation Buyers of financial-advisory practices determine return on investment (ROI) by measuring three critical factors; revenue, revenue growth and costs/expenses (including acquisition debt service). Growth is generally a significant factor in achieving the required ROI. For the purposes of this evaluation, we are measuring growth factors within the existing book of business; as opposed to the more subjective "potential" growth. The weight given to a specific growth factor will vary from buyer to buyer, depending on their ability to capitalize on it.
Practice Valuation by Key Management Group
Cash Flow Analysis Date Advisor Option #1 Starting Post Payout GDC Growth Rate Starting Expenses % Starting Expenses Growth Rate Asking Price Down Payment % Down Payment $ Note Carried by Seller Interest Rate Payments per year Down Payment Financed Down Payment Note Term Years Interest Rate Payments per year
1/24/2014 Sample $1,178,614 10.00% 48.00% $565,735 6.00% $2,513,174 25.00% $628,293 $1,884,880 5.00% 4 No 0 1 4.00% 4
Hurdle Rate 18.00% *Conservative Opportunity + Risk Index
Option #1 Term:
5
Years
Debt Service
Owner Retained Earnings
Asking Price: $2,513,174 Down Payment Acquisition Net to Year # Revenue Growth Expenses Growth Debt Service Debt Service Buyer 0 $1,178,614 $565,735 1 $1,296,475 10.00% $599,679 6.00% 0 $428,399 $268,398 2 $1,426,123 10.00% $635,659 6.00% 0 $428,399 $362,065 3 $1,568,735 10.00% $673,799 6.00% 0 $428,399 $466,537 4 $1,725,608 10.00% $714,227 6.00% 0 $428,399 $582,983 5 $1,898,169 10.00% $757,081 6.00% 0 $428,399 $712,690 6 $2,087,986 10.00% $802,505 6.00% 0 0 $1,285,481 7 $2,296,785 10.00% $850,656 6.00% 0 0 $1,446,129 8 $2,526,463 10.00% $901,695 6.00% 0 0 $1,624,768 9 $2,779,110 10.00% $955,797 6.00% 0 0 $1,823,313 10 $3,057,021 10.00% $1,013,145 6.00% 0 0 $2,043,876 TOTALS: $0.00 $2,141,993 $10,616,241 * Option #2 uses the same down payment %, interest rate and payments per year as option #1.
Option #2 Term: Year # 0 1 2 3 4 5 6 7 8 9 10
3
Years
Asking Price: $2,123,742 Revenue Growth Expenses $1,178,614 $565,735 $1,296,475 10.00% $599,679 $1,426,123 10.00% $635,659 $1,568,735 10.00% $673,799 $1,725,608 10.00% $714,227 $1,898,169 10.00% $757,081 $2,087,986 10.00% $802,505 $2,296,785 10.00% $850,656 $2,526,463 10.00% $901,695 $2,779,110 10.00% $955,797 $3,057,021 10.00% $1,013,145 TOTALS:
Practice Valuation by Key Management Group
Debt Service
0 0 0 0 0 0 0 0 0 0 $0.00
20.70% 25.39% 29.74% 33.78% 37.55% 61.57% 62.96% 64.31% 65.61% 66.86%
Owner Retained Earnings
Down Payment Acquisition Growth Debt Service Debt Service 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
%
$575,056 $575,056 $575,056 0 0 0 0 0 0 0 $1,725,168
Net to Buyer $121,740 $215,407 $319,880 $1,011,382 $1,141,089 $1,285,481 $1,446,129 $1,624,768 $1,823,313 $2,043,876 $11,033,065
% 9.39% 15.10% 20.39% 58.61% 60.12% 61.57% 62.96% 64.31% 65.61% 66.86%
Investment Metrics Hurdle Weighted Rate ROI 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
2.70% 7.39% 11.74% 15.78% 19.55% 43.57% 44.96% 46.31% 47.61% 48.86%
Investment Metrics Hurdle Weighted Rate ROI 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
-8.61% -2.90% 2.39% 40.61% 42.12% 43.57% 44.96% 46.31% 47.61% 48.86%
Glossary of Terms Asset Velocity: The ratio of revenue to assets; also referred to as “Return on Assets” = (Total GDC/Assets under Management)*100 Business Valuation: The act or process of arriving at an opinion or determination of the economic value of a business; or an interest therein Cash Flow: The excess of sources of cash over uses of cash. Cash flow is used in performing the discounted cash flow analysis Discounted Cash Flow: The present value of future earnings discounted at a rate that approximates the risk Discount Rate: A “hurdle rate” that combines a risk free return rate and an industry specific liquidity risk factor Fair Market Value: The price at which a business would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell Net Present Value: The sum of the present values (PVs) of the individual cash flows of the same entity Total GDC: Revenue generated before the advisor specific “payout rate” o Post Payout GDC: Revenue received after the advisor specific “payout rate” is applied Terms: Details of an agreement such as price, payment schedule, interest rate and due date Transaction Based GDC: Commission based revenue generated (up front) or non-recurring revenue before the advisor specific “payout rate”
Practice Valuation by Key Management Group
Practice Value Statistics The average recurring revenue multiple has risen over the past ten years; with buyers currently keeping pace with the increased volume of sales (seller’s market). Currently, the average multiple for recurring revenue is 2.475. The average non-recurring revenue multiple is currently 0.90. The average deal was structured with 25% down payment, 75% seller financed (note payable). The length of seller financing averaged 5 years. Average ratio of recurring to non-recurring revenue is 80%/20%. *Our approximate averages for Deals over the past 12 months.
Quick Tips Seller: o Be clear and transparent about your practice succession vision o The terms of the deal are more important than the sale price o Focus on the best buyer for your business over the highest offer o Most Sellers only sell one business in their lifetime – enlist the help of professionals Buyer: o Your ability to transfer and service the acquired clients is the foundation of any deal o Make acquisition decisions based on a conservative cash flow model o The only good deal works for the everyone - clients, buyer and seller o Respect the acquisition learning curve – enlist the help of professionals
Practice Valuation by Key Management Group
All rights reserved. Except as permitted under the Copyright Act of 1976, no part may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. Warning and Disclaimer: This valuation is subject to certain assumptions and limiting conditions. Key Management Group Inc. has not audited or otherwise verified the information provided by the subscriber of these valuation services. Information supporting conclusions as to value is subject to the subscriber’s submission of complete and accurate financial data; including the accuracy of third party reports provided by the subscriber. Possession of this valuation report, or a copy thereof, does not carry with it the right of publication of all or any part of it, nor may it be used for any purpose, by anyone but the person for whom it was prepared, without the previous written consent of the client and Key Management Group. The information in this valuation is provided on an as-is basis. Key Management Group, Inc. shall have neither liability nor responsibility to any person or entity with respect to any loss or damages arising from the information contained in this valuation report. The opinion of value provided herein does not constitute a price guarantee. Printed in the United States of America. Key Management Group, Inc. has prepared the contents of this valuation report as a guide only. We recommend that you consult your local attorney and accountant for additional counsel prior to making final business or financial decisions. IRS CIRCULAR 230 NOTICE: To the extent that this message or any related material concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Practice Valuation by Key Management Group
Practice Valuation by Key Management Group
Our Practice Valuation and Consulting service provides you with accurate and meaningful information to guide you in succession planning, practice acquisitions, and equity management.
Our Approach
Unique Methodology
Individualized Service
We provide a unique combination of real life
We deliver a valuation that integrates the
Consulting is part of every valuation that we
experience, traditional M&A principals, and
industry specific “market” based valuation
deliver - we go deeper than the numbers in
industry specific market knowledge. In
with the more established M&A practice of
the analysis. Our process includes a focus on
addition, our analysis is provided within the
using a “discounted cash flow” method. The
the “non-price” factors that can greatly
context of a consulting relationship.
integration of the two methods balances the
influence the success of a deal
views of buyer and seller
Benefits Information and advice you can trust to make “game changing” decisions
Value accuracy resulting from our integrated dual valuation methodology
Practice Valuation by Key Management Group
A better understanding of all the factors that make your deal successful
It is important that you have a general understanding of our valuation methodology to get the maximum value from this analysis. A detailed review will take place during our phone consultation.
Valuation Methodology Our valuation methodology is unique in that it utilizes the commonly used financial services industry standard “market approach” with a more established mergers and acquisition “income approach” (discounted cash flow). By establishing a value based upon the average of the two methods, you can be assured that the value is a fair representation of the true value. Market Approach Method Our market based valuation methodology looks at the ratio of recurring and non-recurring revenue. Recurring revenue multiples increase as the ratio of recurring to non-recurring revenue increases. Non-recurring revenue multiples are based on how long it takes to access or re-position the assets that are currently not generating recurring revenue. These, and other, ratios are used to determine comparable value of current market prices. Income Approach Method Our discounted cash flow methodology uses a discount or “hurdle” rate by combining a risk free return rate of return (U.S. Treasury Bills) and an industry specific liquidity risk factor. By using a net revenue (after operating expenses) benchmark, our analysis provides you with a solid cash flow based valuation (Net Present Value).
Practice Valuation by Key Management Group
Your Practice Valuation
Valuation Summary November 11th, 2014 Based on the currently available data, it is my opinion that the fair market value of this book of business is:
*$2,513,174 Todd Doherty
Todd Doherty Mergers and Acquisitions Specialist Key Management Group
*The summary value is based on “common” terms currently being used in financial practice acquisitions (25% down with the balance due on a 60 month note)
Practice Valuation by Key Management Group
PRACTICE DATA Advisor Name Total GDC Current 26 PD Transaction Based Revenue % Transaction Based Revenue
Sample $1,295,180 19% $223,937
Date
1/24/14
Assets Under Management
$171,281,000
Payout %
91%
Post Payout GDC (Revenue)
$1,178,614
Recurring Revenue %
81%
Asset Velocity
Recurring Revenue
$954,677
Value Impact of Asset Velocity
0.76 Positive
3 YEAR TERM Transaction Revenue Multiple Growth Rate
0.60 10.00%
Recurring Revenue Multiple Discount Rate
2.35 18.00%
Reference Value Down Payment %
25%
Down Payment
Annual Interest Rate
5%
Payments Per Year
4
3
Principal & Interest
$1,725,168
Term in Years
$530,935.41
Multiple Based Valuation
$2,377,853
Discounted Cash Flow Valuation
$1,869,630
Mixed Average Valuation
$2,123,742
Note Carried By Seller
$1,592,806
Scheduled Payment Amount
$143,764
Total Economic Value
$2,256,103
Multiple Based Valuation
$2,586,763
Discounted Cash Flow Valuation
$2,439,585
Mixed Average Valuation
$2,513,174
Note Carried By Seller
$1,884,880
*5 YEAR TERM Transaction Revenue Multiple Growth Rate
1.00 10.00%
Recurring Revenue Multiple Discount Rate
2.48 18.00%
Reference Value Down Payment %
25%
Down Payment
Annual Interest Rate
5%
Payments Per Year
4
5
Principal & Interest
$2,141,993
Term in Years
Practice Valuation by Key Management Group
$628,293.47
Scheduled Payment Amount Total Economic Value
$107,100 $2,770,286
Benchmark Data Risk Factors Client Decile Top 10% 2nd 10% 3rd 10% 4th 10% 5th 10% 6th 10% 7th 10% 8th 10% 9th 10% 10th 10%
Average Client Age Compared to Benchmark Sample Benchmark Difference 64 65.09 -1.09 62 63.79 -1.79 61 62.79 -1.79 60 62.28 -2.28 60 60.80 -0.80 59 59.65 -0.65 58 57.72 0.28 57 55.68 1.32 52 52.16 -0.16 53 53.56 -0.56 Client Group Metrics
Year to Date Net Flows 26 Service Period GDC Growth Rate Lost Client Groups (26 SP VS Previous 26 SP) % of Client Groups with a 26 SP Plan % of High Value Client Groups with a 26 SP Plan Asset Velocity (Return on Assets)
Length of Relationship in Years Compared to Benchmark Sample Benchmark Difference 11 15.03 -4.03 10 14.89 -4.89 8 14.00 -6.00 9 14.65 -5.65 8 14.00 -6.00 9 13.54 -4.54 9 13.28 -4.28 11 12.47 -1.47 8 10.62 -2.62 8 10.31 -2.31
% of Total TOS GDC Compared to Benchmark Sample Benchmark Difference 38.20 41.40 -3.20 17.10 19.24 -2.14 13.80 13.02 0.78 10.40 8.38 2.02 6.70 6.16 0.54 5.00 4.16 0.84 3.70 2.60 1.10 2.20 1.73 0.47 1.10 1.36 -0.26 1.80 1.75 0.05
Client Group Metrics Compared to Benchmark Sample Benchmark Difference $4,913,400 $1,914,991 156.58% 62.00% 17.11% 262.41% 68.00% -39.15% 273.67% 42.00% 20.77% 102.21% 63.00% 29.57% 113.07% 0.76 0.80 -4.23%
Risk Special Notes
Decile Groupings
Client Group
Risk Evaluation Buyers of financial-advisory practices should evaluate risk carefully to determine whether it is justified by the anticipated reward. While there are certainly a number of metrics and operational practices that represent areas of potential risk, the metrics measured above are common in due diligence. The weight given to a specific risk factor will vary from buyer to buyer, depending on their ability to address it.
Practice Valuation by Key Management Group
Benchmark Data Growth Factors Client Group Metrics
High Value Client Groups HVC Ratio (# of HVC compared to total # of clients) Average Client Group GDC Average High Value Client Group GDC Average Client Group AUM 26 Service Period GDC Growth Rate % of Client Groups with a 26 SP Plan % of High Value Client Groups with a 26 SP Plan Asset Velocity (Return on Assets) Payout Rate
Client Group Metrics Compared to Benchmark Sample Benchmark Difference 252 126 126 47.46% 50.35% -5.74% $1,733 $1,960 -11.60% $3,195 $3,283 -2.67% $177,906 $251,997 -29.40% 62.00% 17.11% 262.41% 42.00% 20.77% 102.21% 63.00% 29.57% 113.07% 0.76 0.80 -0.04 91.00% 85.00% 7.06%
Growth Special Notes
Client Group
Growth Evaluation Buyers of financial-advisory practices determine return on investment (ROI) by measuring three critical factors; revenue, revenue growth and costs/expenses (including acquisition debt service). Growth is generally a significant factor in achieving the required ROI. For the purposes of this evaluation, we are measuring growth factors within the existing book of business; as opposed to the more subjective "potential" growth. The weight given to a specific growth factor will vary from buyer to buyer, depending on their ability to capitalize on it.
Practice Valuation by Key Management Group
Cash Flow Analysis Date Advisor Option #1 Starting Post Payout GDC Growth Rate Starting Expenses % Starting Expenses Growth Rate Asking Price Down Payment % Down Payment $ Note Carried by Seller Interest Rate Payments per year Down Payment Financed Down Payment Note Term Years Interest Rate Payments per year
1/24/2014 Sample $1,178,614 10.00% 48.00% $565,735 6.00% $2,513,174 25.00% $628,293 $1,884,880 5.00% 4 No 0 1 4.00% 4
Hurdle Rate 18.00% *Conservative Opportunity + Risk Index
Option #1 Term:
5
Years
Debt Service
Owner Retained Earnings
Asking Price: $2,513,174 Down Payment Acquisition Net to Year # Revenue Growth Expenses Growth Debt Service Debt Service Buyer 0 $1,178,614 $565,735 1 $1,296,475 10.00% $599,679 6.00% 0 $428,399 $268,398 2 $1,426,123 10.00% $635,659 6.00% 0 $428,399 $362,065 3 $1,568,735 10.00% $673,799 6.00% 0 $428,399 $466,537 4 $1,725,608 10.00% $714,227 6.00% 0 $428,399 $582,983 5 $1,898,169 10.00% $757,081 6.00% 0 $428,399 $712,690 6 $2,087,986 10.00% $802,505 6.00% 0 0 $1,285,481 7 $2,296,785 10.00% $850,656 6.00% 0 0 $1,446,129 8 $2,526,463 10.00% $901,695 6.00% 0 0 $1,624,768 9 $2,779,110 10.00% $955,797 6.00% 0 0 $1,823,313 10 $3,057,021 10.00% $1,013,145 6.00% 0 0 $2,043,876 TOTALS: $0.00 $2,141,993 $10,616,241 * Option #2 uses the same down payment %, interest rate and payments per year as option #1.
Option #2 Term: Year # 0 1 2 3 4 5 6 7 8 9 10
3
Years
Asking Price: $2,123,742 Revenue Growth Expenses $1,178,614 $565,735 $1,296,475 10.00% $599,679 $1,426,123 10.00% $635,659 $1,568,735 10.00% $673,799 $1,725,608 10.00% $714,227 $1,898,169 10.00% $757,081 $2,087,986 10.00% $802,505 $2,296,785 10.00% $850,656 $2,526,463 10.00% $901,695 $2,779,110 10.00% $955,797 $3,057,021 10.00% $1,013,145 TOTALS:
Practice Valuation by Key Management Group
Debt Service
0 0 0 0 0 0 0 0 0 0 $0.00
20.70% 25.39% 29.74% 33.78% 37.55% 61.57% 62.96% 64.31% 65.61% 66.86%
Owner Retained Earnings
Down Payment Acquisition Growth Debt Service Debt Service 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
%
$575,056 $575,056 $575,056 0 0 0 0 0 0 0 $1,725,168
Net to Buyer $121,740 $215,407 $319,880 $1,011,382 $1,141,089 $1,285,481 $1,446,129 $1,624,768 $1,823,313 $2,043,876 $11,033,065
% 9.39% 15.10% 20.39% 58.61% 60.12% 61.57% 62.96% 64.31% 65.61% 66.86%
Investment Metrics Hurdle Weighted Rate ROI 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
2.70% 7.39% 11.74% 15.78% 19.55% 43.57% 44.96% 46.31% 47.61% 48.86%
Investment Metrics Hurdle Weighted Rate ROI 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
-8.61% -2.90% 2.39% 40.61% 42.12% 43.57% 44.96% 46.31% 47.61% 48.86%
Glossary of Terms Asset Velocity: The ratio of revenue to assets; also referred to as “Return on Assets” = (Total GDC/Assets under Management)*100 Business Valuation: The act or process of arriving at an opinion or determination of the economic value of a business; or an interest therein Cash Flow: The excess of sources of cash over uses of cash. Cash flow is used in performing the discounted cash flow analysis Discounted Cash Flow: The present value of future earnings discounted at a rate that approximates the risk Discount Rate: A “hurdle rate” that combines a risk free return rate and an industry specific liquidity risk factor Fair Market Value: The price at which a business would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell Net Present Value: The sum of the present values (PVs) of the individual cash flows of the same entity Total GDC: Revenue generated before the advisor specific “payout rate” o Post Payout GDC: Revenue received after the advisor specific “payout rate” is applied Terms: Details of an agreement such as price, payment schedule, interest rate and due date Transaction Based GDC: Commission based revenue generated (up front) or non-recurring revenue before the advisor specific “payout rate”
Practice Valuation by Key Management Group
Practice Value Statistics The average recurring revenue multiple has risen over the past ten years; with buyers currently keeping pace with the increased volume of sales (seller’s market). Currently, the average multiple for recurring revenue is 2.475. The average non-recurring revenue multiple is currently 0.90. The average deal was structured with 25% down payment, 75% seller financed (note payable). The length of seller financing averaged 5 years. Average ratio of recurring to non-recurring revenue is 80%/20%. *Our approximate averages for Deals over the past 12 months.
Quick Tips Seller: o Be clear and transparent about your practice succession vision o The terms of the deal are more important than the sale price o Focus on the best buyer for your business over the highest offer o Most Sellers only sell one business in their lifetime – enlist the help of professionals Buyer: o Your ability to transfer and service the acquired clients is the foundation of any deal o Make acquisition decisions based on a conservative cash flow model o The only good deal works for the everyone - clients, buyer and seller o Respect the acquisition learning curve – enlist the help of professionals
Practice Valuation by Key Management Group
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Practice Valuation by Key Management Group
