As a financial planning firm, you know how crucial diversification and clever asset allocation is to your clients’ financial futures. They mustn’t be overly focused on any single type of asset but instead must diversify across property, bonds, stocks, and other investment areas. You’re helping to realize people’s financial goals, but are you placing the same scrutiny on your own company? In not, then that needs to change. You need to put the same effort into your own financial future.
The very advice and techniques that you use to transform your clients’ finances must be used for the betterment of your own organization. You also need to balance your investments, whether they be your property portfolio, your equity, or anything else for that matter.
Why you need to institute fair market value
One mistake many business owners make is to put so much effort into increasing the value of their businesses that they overlook their other speculations. It’s very common even for business owners with many external investments to have the majority of their money tied up in their companies. But this isn’t a good thing. In fact; being overly focused on your business is an endeavor that’s fraught with risks.
That said; a deep and holistic analysis of the organization is necessary to truly know where it’s at. Without knowing the exact worth of the company its asset allocation can’t be accurately calculated.
Whether or not you plan to sell your business, it’s still crucial to work out its fair market value and the best way to do this is via the discounted cash flow technique.
Explaining The Discounted Cash Flow Technique (DCF)
The discounted cash flow method uses honest estimations of how much money a company will make in the future to ascertain its worth in the present day.
Ultimately this comes down to making educated guesses which can never be 100% certain but it’s usually regarded as best practice for a financial planning company to get its fair market value.
It states that the value of the company is essentially the amount of money it could provide its investors with at some future point.
Due to inflation, the worth of any dollar or pound of a company’s earnings will be less in the future than in the present day but the DCF technique takes this into account. It also looks at risks related to a company’s particular customers, market, and business stability to provide further adjustments to this figure. It looks at AUM, customer age, growth rate predictions, various income streams, whether or not top employees have signed non-compete agreements, and more. This all comes together to give the
company a certain amount of value in the eyes of those who might buy it and hence dictate the amount of money they’re willing to spend when doing so.
If the financial planning company is projected to earn $500,000 over the next 12 months, the value of that money would be larger in contemporary currency than it would be in future. The projected earnings would then be calculated for future years with inflation taken into account in order to create the company’s valuation.
As mentioned, the benefits of the DCF method include the fact that it’s the most accurate way to get a true estimation of the value of a private business. And it also makes it easier to ascertain its actual asset allocation. The DCF method can provide some sobering truths for many a deluded owner or manager. Whether you’re looking to plan your company’s expansion, take out loans, or plan your estate, it will give you a great idea of exactly where you stand.
Succession Link has built an online platform that makes it easy and convenient for you to find the perfect buyer for your financial practice or to locate a practice that is the right fit for an acquisition and the growth of your business. Click the link to find out how Succession Link can help you.