I have had the pleasure of interviewing several financial advisers across Southern California who have bought and sold books of businesses. Here are some numbers from these case studies.
David Grau of FP Transitions cites down payments between 10 and 40% in his book Buying, Selling and Evaluating Financial Planning Practices. Having interviewed advisors, I found that Grau’s numbers are indeed averages; I have come across outliers in my interviews; I have seen down payments as small as 10%, and as large as 70%.
Though down payment size has varied wildly, the note for the balance of the sale price has been uniform. A note of five years is common.
For recurring revenue, multiples have ranged between 1 and 3x. One important variable in determining value on recurring revenue is average account size. As John Turner of Live Oak Bank shared, having numerous small accounts will decrease the value of your business.
Recurring revenue fetches a different multiple than one-time revenue. One-time revenue – such as commission sales from an annuity – can fetch a multiple as low as 0.25x, (as one advisor in San Diego who has bought four businesses shared with me).
On average, roughly 80% of a book’s sale price will be taxed as goodwill, reports Grau in his book. (This is preferential tax treatment for the seller. Goodwill sold is taxed as a long-term capital gain.) The balance of a sale price can be taxed at the marginal rate, as consulting services.
What Matters Most to You?
Depending upon what’s most important to you (be it a large down payment, a high valuation, or a high-interest rate on a seller-financed noted) will dictate the balance of payment terms. If you absolutely must have a large down payment, that means you may have to settle for a longer payout period for the balance of the sale price. Alternatively, if you insist on a high-interest rate for a seller-financed noted, you may have to settle for interest-only payments on the balance of that note for the first year.
If you’re looking to sell your book of business, think about what sale terms matter most to you.