- Mar 5
- 6 min read
Updated: Mar 19
Step 1: Understand the Value of Your Business
By Fiona Ettles, Partner at FinConnect
The first step in any succession plan
When owners start thinking about succession, whether that means selling externally, transitioning to staff, or bringing in equity partners, the first conversation should always begin with the same question:
What is the business actually worth?
It sounds simple, but this is where many succession journeys run into difficulty before they even begin. The value a business owner expects their firm to be worth often differs significantly from its actual market value.
This gap can create friction, delay succession plans, and sometimes derail transactions entirely.
Understanding the value of your business early allows you to make informed decisions, set realistic expectations, and build a strategy that works for both the current owner and future shareholders.
Why business owners often get the value wrong
Over the years, we’ve seen a number of common reasons why expectations and reality don’t align.
Lack of visibility: Many owners are busy serving clients and managing staff. Valuation is rarely something they spend time analysing until they’re ready to exit. Unfortunately, by that point the timeline may be tight.
Outdated valuation assumptions: A common example in professional services is relying on simple rules of thumb, such as valuing a business purely on recurring revenue.
While recurring revenue is an important factor, modern valuations also consider profitability, return on investment, risk, growth potential, client demographics, team structure, and operational systems.
Misaligned valuation approach: The valuation method needs to align with the type of transaction being undertaken. For example, if the goal is to transition equity to staff internally, pricing the business purely on recurring revenue may result in a payback period that simply isn’t commercially viable for the buyer.
Retirement-based expectations: Sometimes a valuation expectation is built around what the owner needs financially for retirement, rather than what the business itself can support. Unfortunately, the market does not work backwards from personal retirement goals.
“The man at the pub”: We often hear something like:
“Someone at my tennis club sold their business for 10x.”
Stories like this travel fast, but context rarely does. Different client bases, margins, locations, licensing arrangements, and growth prospects can produce vastly different outcomes. Importantly, terms play a big part in every transaction – someone may pay a larger multiple but you’re likely to face longer payment terms and greater contingent payments to manage the buyers risk profile.
As the saying goes, it’s a bit like the fish that got away; it’s always the biggest.
Why understanding value early matters
Knowing the value of your business years before a transaction gives you something powerful: Time to influence the outcome.
Value is not static. It can be improved through strategic decisions around pricing, staffing, profitability, and growth.
Below are a few real-world scenarios that illustrate how understanding value early can shape better outcomes.
Case Study #1: Valuing the business years before succession
We worked with a four-partner firm that wanted to better understand their business value before any transaction.
Their goals were simple:
Improve the value of the firm
Reduce the risk of shareholder disputes
Treat the business as a long-term investment
Every two years we revalued the business, benchmarking progress against targets for:
Revenue growth
Profitability
Overall valuation
Over time, the firm grew both organically and through acquisitions. When assessing potential acquisitions, we helped them evaluate key questions:
Could they afford the asking price?
What repayment structure would be commercially viable?
What was the expected payback period?
How could risk be managed?
One acquisition was priced at the higher end of the market for their region, but it included two staff members who were culturally aligned with the business.
Five years later:
One of those staff members became an equity partner
The client base acquisition produced a 50% revenue uplift by year two
Only a small number of clients were lost during transition
Because the partners understood the client fee structures and industry benchmarks beforehand, they knew there was significant room for fee improvement. This reduced the payback period dramatically and lifted profit margins to industry benchmarks.
Later, when a shareholder needed to exit unexpectedly, the firm had a recent valuation already agreed upon.
The transaction was completed in less than a month, and relationships between the partners remained intact particularly important in smaller communities where reputations matter.
Case Study #2: When a valuation pauses a transaction
In another case, we worked with a two-owner practice that had previously purchased the business from a retiring owner. The original purchase had been based purely on recurring revenue multiples, without a formal valuation.
When the owners later wanted to sell a small equity stake to a key employee, they asked us to determine the value.
This time, the valuation was based on profitability and return on investment, which is the correct approach for an incoming equity holder. The result came in at around 60% of the original price they had paid the previous owner-ouch!
While initially confronting, the owners quickly understood the reason.
Their business generated around $1 million in revenue, but with four staff members and limited scale, profit margins were relatively low.
Over the next twelve months they worked deliberately to improve the business:
Streamlined client pricing onto a consistent model
Indexed fees properly for inflation
Improved operational efficiencies
Introduced fees for services previously delivered without charge
Reviewed software subscriptions and removed unused systems
Twelve months later, the valuation had improved materially. More importantly, the owners gained clarity around:
Repaying their original acquisition loans
Improving their personal financial outcomes; and
After doing the hard yards for the 12 months, whether the proposed incoming shareholder was the right cultural fit
Case Study #3: Growth businesses and valuation timing
Valuation is also complex when businesses are growing rapidly. One firm we worked with had recently expanded its team and believed it could handle an additional $1.5 million in revenue without hiring further staff.
The marketing pipeline was strong, but those clients had not yet converted into ongoing revenue – they weren’t even booked in for initial meetings yet. Forecasting future growth in a valuation is possible, but when forecasts differ significantly from historical results, risk adjustments must be applied.
From the owner’s perspective, the valuation felt conservative and that is sometimes unavoidable because valuations are a point-in-time assessment.
The solution was to structure equity release in stages:
5% equity sold initially
Further tranches released when profitability targets were achieved
This structure achieved three outcomes:
Incentivised the incoming shareholder
Reduced risk for the existing owner
Encouraged both parties to work towards shared growth targets
Case Study #4: Introducing equity early in a fast-growing firm
In another example, we worked with a multi-million-dollar financial planning business led by a sole owner. The business had:
A strong management team
Significant investment in systems and processes
Rapid growth forecasts
The owner wanted to introduce equity to key employees while the business was still growing. His Accountant suggested waiting until later to maximise the sale price. But his thinking was different. By bringing key employees into ownership earlier:
Engagement and accountability increased
Leadership responsibilities were shared
Growth accelerated
He also recognised that if the business doubled in value over the next five years (as his plan suggested) the opportunity to buy equity might become too expensive for staff to access.
The incoming shareholders had helped shape the five-year plan and now had a genuine stake in achieving it. They were already motivated employees. Now they were also invested owners.
Case Study #5: Using valuation to restructure ownership
One later-life business owner had a different challenge. He had previously sold his house to purchase the business and now wanted to rebalance his personal finances while introducing equity to younger team members. The solution involved refinancing retained earnings through business debt.
This reduced the share price of the business and created an opportunity for younger staff to buy in.
Example structure:
Business Value | $2,500,000 |
Bank Loan | $2,000,000 |
Share Value | $500,000 |
This meant: 10% equity cost $50,000 instead of $250,000.
The shares were vendor-financed with repayment plans of two to three years. For the younger advisers, the decision was no longer about affordability; it became a question of whether they wanted to be owners. For the founder, it solved his personal goal of purchasing a home while also building a succession pathway.
The key takeaway
Understanding the value of your business early gives you options.
It allows you to:
Set realistic expectations
Structure internal succession fairly
Improve profitability and valuation over time
Avoid disputes between shareholders
Make strategic decisions about growth and acquisitions
Most importantly, it allows succession to happen on your terms, rather than under pressure.
Step 1 of Internal Succession Planning
Understanding business value is the foundation of any succession plan.
If you’re considering introducing equity to staff, transitioning ownership gradually, or preparing for an eventual exit, this is where the journey should begin.
You can explore the full framework in our Internal Succession Guide, which walks through the stages professional services firms typically move through when planning ownership transitions.
If you don’t already have the guide, you can download it here. And if you’re ready to chat, book in a call with Fiona here.
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