Cost and the ability for practice owners to address costs will be key to achieving premium valuations as acquirers get more active on the other side of the pandemic, heads of prominent licensees have said.
“I think there are interesting times ahead for valuations, particularly for those who embrace the change,” Darren Whereat, head of advice at IOOF said during a panel discussion at the recent Licensee Summit Digital event.
“There is an opportunity to reshape the business, particularly on the expense line,” Whereat, who was joined by Centrepoint Alliance CEO Angus Benbow and GM of Profile Financial Services, Lena Ridley (pictured) as part of a session entitled ‘Leading through a pandemic’.
There will be strong demand for the right businesses, Whereat reckons.
“Those that are digitised, the ones that are moving more towards eliminating manual practices, not at the expense or degradation of client services… the cost to your business is lower and therefore throwing out a higher EBIT [earnings before interest and tax],” he said.
“This will be an interesting time for valuations,” Whereat added.
The panel agreed acquirers are valuing businesses based on their EBIT margins instead of multiples of revenue which is more of an “old world” measure of value.
“There seems to be a two-speed trend happening at the moment – those businesses that have handled the environment exceptionally well, and those that have had to go through significant staff cuts. [Business performance] is testament to the underlying operating model,” Profile’s Ridley said.
“There will be opportunities and the well run businesses will be able to take advantage depending on what happens to the profitability of firms over the next 6 months to 2 years,” she said.
Certainty of revenue is indeed top of mind for acquirers at the moment, Centrepoint’s Benbow said.
“The market already shift to looking through revenue lines before the crisis,” he noted.
Because there are increasing costs to delivering services because of regulation, acquirers want to ensure costs are built into profit margins, he said.
Once those costs to service clients are built in, it will be those businesses able to find new efficiencies through innovation and other was that will be sought after by acquirers, he said.