Valuing a finance company
Finance companies, including banks, insurance companies and financial service firms, are appealing investment prospects during periods of economic expansion. As with any business acquisition, finance companies must be valued before they are purchased.
The value of a finance company relies on many things, including:
- The category of the finance company
- The health of the economy
- Shifts in branding and consumer trust
- How customer-focused the business model is
- Access to networks outside of the organisation
- The company's book value
- Several risks, including changing regulations
At Nash Advisory, we are experts at valuing finance companies. You can rely on our decades of experience and proven track record of successful results. If you're considering buying a finance business, or any other significant asset, talk to our team today.
1. Types of finance companies
Finance businesses are fundamentally different from other industries. Within the financial industry, there are a variety of sub sectors, which are outlined in the table below.
2. Key value drivers for finance firms
Being a successful finance company means having a strong balance sheet. Finance businesses must also remain prudent when it comes to investments, accounting estimates and decisions, and remain nimble and diversified in the face of a quickly changing environment.
Macroeconomics affects how individuals and firms choose to use, borrow, or save their money. In short, if the economy is performing well, so are finance companies. Here are some key indications that reflect the health of the economy:
- Levels of unemployment and rate of wage growth
- Rate of inflation (or deflation)
- Levels of consumer and business confidence
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in February 2019 has deteriorated the image of Australian financial institutions. The report has had far-reaching implications for many finance businesses:
- Several finance industry brands were named in the final report, leading to a drop in brand value.
- Major brands in other industries were also targeted, including real estate, energy and automotive.
- The extent of this damage is far reaching, and consumer confidence and trust has taken a dive.
This provides opportunities for smaller, emerging players to succeed. Time will tell if this increased competition affects the value of existing financial entities.
For many businesses, the importance of a customer comes from the purchasing of goods or services. However, for finance companies, the value of the customer is derived from their long-term relationship with the business. A valuable customer in the finance industry is one who:
- Has a strong financial credit history
- Is a long-term repeat customer
- Requires multiple services like loans, insurance, deposits and investments
The diversity of the customer base is increasingly important. As with any company, the more customers you have, the greater the value of the company.
Networking for success
Financial businesses flourish when they are well connected to other services, allowing customers to fulfil other requirements with ease. An easy way to increase the value of a finance business is to add networks and services as they grow.
- Banks must ensure their customers are able to withdraw funds, so having multiple withdrawal partners is key.
- Banks also offer credit cards, home loans and insurance, as well as standard savings accounts.
- Superannuation companies might offer investment advice.
3. The process of valuing finance firms
Traditional valuation methods are usually unsuitable measurements for finance firms. Finance companies don't generate revenue in a traditional sense, so its hard to get a grasp of their profitability. Thankfully, book value is a suitable proxy for revenue.
- Book value is the value of securities or assets entered on a firm's books.
- By analysing a company's Price/Book ratio, we can find out its true value range.
Examples of recent industry transactions
Example 1. SG Fleet Australia purchased Fleet Hire Ltd (UK) for $35m
Fleet Hire (UK) is a provider of short term rental, fleet management services, contract hire and salary sacrifice services. This acquisition offered SG Fleet Australia an opportunity to extend their success overseas and integrate some of the offerings from Fleet Hire into the Australian market.
The main opportunities for SG Fleet Australia were to:
- Increase the penetration of vehicle salary sacrifice and short term rental services
- Increase cost consolidation
- Align growth objectives of both entities
This acquisition shows a need for Australian firms to go offshore to find suitable investments to broaden their offering.
Example 2. Sargon Capital acquired OneVue Holdings’ Trustee Services business for $45m
Sargon Capital, an Australia-based provider of trustee services, purchased OneVue Holdings’ Trustee Services - an Australia-based financial services company.
OneVue provides superannuation trustee, administration, promotion and investment services to superannuation fund trustees and superannuation fund promoters.
The key proposition for Sargon was to expand their capability and market share in this key segment, and grow their overall scale in custodial and trustee services. The key value drivers were:
- The size of the underlying funds under management
- An increase in number and calibre of members
Given the large recurrent nature of the revenue, the acquisition attracted a very high multiple for a finance business.
4. Risk factors that impact value
While all of the above factors are fundamental to creating and maintaining value, certain risks can substantially reduce the value of a business. Key risks have been presented by the fallout of Royal Commission, including:
- Changing accounting principles
- Tighter lending criteria
- Strict regulations and restrictions
- Difficulty in estimating cash flows