Practice management consultants Business Health has launched a financial planning practice valuation tool that uses profit multiples.

Most tools use recurring revenue multiples, but Business Health CEO Rod Bertino says profits deliver a better pricing outcome.

The company evaluated more than 160 practices and found average sale prices were 2.8 times recurring revenue, compared with 6.7 times profit.

Recurring revenue valuations do give a high degree of certainty, because the income is ongoing, Mr Bertino says.

“An advance on the recurring revenue approach is the multiple of profit, which looks at the earnings before interest and tax, less business expenses.

“This method tends to provide a much more solid basis on which to value a business, because it focuses on the bottom-line profit of the business.”

Profit valuations are now being used more widely, but not all principals are convinced.

“The use of the recurring revenue model… is slowly changing,” Mr Bertino said. “One of the impediments to this is that business owners generally think the multiple of recurring revenue will deliver a higher valuation number. 

“This finding has some important implications for business owners, who need to ask themselves if it is a reflection of broader trends and what it might mean for their practice.”