Evaluating an investment book

Anything is only worth what a buyer is prepared to pay for it. So, to determine the right price for an investment book, one should consider the book from the purchaser's point of view.

Recent market developments have contributed to enterprising financial planners building up substantial investment books. Many of these investment books are now for sale.

Establishing the value

Once a potential purchaser has decided that they are capable of absorbing extra volume they are faced with two large questions, what is a reasonable price to pay for an investment book and how will the purchase be financed.

Determining the value of a book is often subjective but can be made more objective by following a few steps:

1.Decide on the maximum price that you would pay for the income stream from a book?
This may be a simple multiple of maximum annuity income for smaller books or applying an acceptable PE ratio to larger books. Let this maximum represent 100% of what you are prepared to pay.

2.List all parameters you consider to be important to an investment book.
Assign each parameter a score out of 10 depending on the importance of that parameter and decide on how a perfect score for each parameter would be achieved. These are a few of the parameters we usually consider:

*Is the book systems driven? This parameter would have an importance of 10. If all clients are used to being part of a complete risk related managed solution as opposed to each client being looked after differently the book would score a 10 out of 10 on this parameter.
*The ratio of prudential versus discretionary clients is important, this parameter would have an importance of 8. The book may score 8 out of 8 if all investments were prudential.
*Average client size is as important as prudential versus discretionary and would also be assigned a maximum score of 8.
*The average age of the client would have a lower importance and have a maximum score of five.

3.Decide how the investment book scores on each parameter.
Add up the scores and divide that sum by the maximum potential score to arrive at a reasonable percentage of the maximum price that you should be paying for the annuity stream.

4.Add expected initial income streams for a period post acquisition, based on proven track record.

Apart from this research there may be an intangible aspect to the book that would encourage you to pay slightly more or slightly less than what the model suggests.

Financing

These are some of the guidelines we recommend when paying for the book:

1.Structure the price according to a gross rand value per amount of business that flows to your business as opposed to the total current assets in the book.

2.Structure the payment into at least two parts. The first to be made as the business flows across and the second to be made 12 months after the business flowed across if it is still on the books.

3.It is usually a worthwhile expense paying the seller a monthly retainer to ensure their assistance for at least two years. This should be bound by a renewable contract
.
Remember to use a reputable lawyer to draft the agreement including clauses such as restraint of trade and arbitration in case of breach.