Three times renewal commissions: this formula for setting the sale price of a book of financial services business has become a popular yardstick. In fact, assets under management (or premiums in force for a life insurance book) are becoming the gold standard for precision valuation of a financial products clientele.
“Critical mass is very important in determining an evaluation multiple because a large mass gives the buyer more leeway to cultivate the business,” says Alain Vézina, president of Nessa Capital, a private business bank based in Montreal.
Mr. Vézina explains that a book with bulk harbours more latent business opportunities. “It contains more contracts without renewal commissions that can result in new business.”
Buyers can tap into this potential to generate a strong flow of regular income for several years. The larger the block, the higher its income potential, because, as Mr. Vézina explains, advisors regenerate their clientele roughly every ten years. If the competition is heated, this average may even shrink to seven years because advisors will solicit clients more actively to avoid losing them.
Mr. Vézina says he rarely participates in a sale of an insurance clientele below four times renewal commissions when the in force is about $500,000 or more in annual premiums. For a book that includes several disability insurance contracts, buyers have been known to pay up to five times renewals.
Size also strongly influences the sale price of investment fund clienteles. Mr. Vézina gave the example of a portfolio with $20 million in assets under management made up almost entirely of guaranteed investment products.
“These products offer only 0.2% in service commissions annually. But the advisor can easily grow the business if he visits clients whose investment profile is too conservative.”
An investment fund portfolio with nearly $10 million in assets under management will be worth between 1.0% and 1.5% of these assets, he points out. A portfolio valued at about $20 million will sell for up to 2.0% of assets under management.
Mr. Vézina believes that vendor input is not ideal in every situation. “It all depends on the circumstances. There are no rules of thumb. Often, the buyer doesn’t want the seller to hang around forever, especially in transactions involving investment fund books.”
When the portfolio seller is on hand, the buyer often lacks the elbowroom to implement his own investment philosophy, Mr. Vézina says.
In his view, seller involvement is best suited to succession transfers or to advisors that want to keep a foot in the industry door.