The process of determining the worth of any business is known as “valuation.” And if you’ve built a financial advisor business, you ought to know how to determine how much your financial advisor business is worth. Business owners don’t just go through this process when they need to sell their business. They might determine their company’s value when securing new investors or even applying for business financing, but most importantly for many financial advisors, it may be a part of your estate and retirement planning as often the value of a financial advisor’s business may be one of their largest assets. Read on to learn more about evaluating your business’ worth.
If you have any other questions, remember to contact our team at Bridgemark Strategies for a complimentary consultation.
Compare Your Business to Others (Market Value)
This method is less direct and requires some research on your part. You assess the value of your business by looking at the value of similar, comparable companies.
It’s the same principle as when you buy or sell a house — you look at other, similarly-sized homes in the same geographic region. Ideally, you should compare your business to other financial advisor businesses of a similar size and with a similar product mix and numbers of clients.
The advantage of this method is that it assigns a value to your business based on fair market value. The final number reflects what prospective buyers may be willing to pay.
Unfortunately, this means that the value of your business can be artificially influenced by the broader market, and you might not always calculate a value that reflects the true value of your company.
Use a Revenue Multiplier
A more simplistic way to value your business is to use a revenue multiplier. This means that you’ll take your financial advisor company’s annual earnings, then multiply them by a number. For example, if your annual income is $500,000, you might multiply by 3 and assess a final value of $1,500,000.
On the one hand, this may seem a bit arbitrary. But the revenue multiplier can be based on things like:
- Your product mix
- Your total assets or revenue
- Your growth rate
This means that your business might be more valuable if you have a product mix that is more fee-based vs commission based and you can use this factor when assessing the value of your business.
Discounted Cash Value Analysis
Another key method is known as discounted cash flow (DCF) analysis. In this method, you’ll focus on how cash flows in and out of your business. This provides a more dynamic portrait of your company’s earnings and can help assess the prospective, future value as well.
The cash flows are discounted to provide a current value using a discount rate. In some cases, the discount rate is the interest on the investment itself, though in other cases the rate will be based on assumptions about a rate of return on the investment.
Prospective investors will use this information to evaluate the return they’ll receive on the investment over time. By deducting their upfront costs from the discounted cash flow, they’ll determine the net present value (NPV). If the NPV is positive, it shows the investors that they can expect a positive return on their investment.
One of the most common methodologies that buyers use to determine price is determining the EBITDA (which stands for Earnings Before Interest Taxes Depreciation and Amortization). This metric is used by calculating the remaining free cash flow from a business after all expenses are paid and then assigning a multiple to that figure to determine the price. Multiples can vary greatly and are heavily weighted based on sources of revenue and overall size.
EBITDA multiples while may be the most common, can also be the most commonly misunderstood or miscalculated. The industry has seen EBITDA multiples range on the low end of 4-6x and on the high end of over 20 times.
The Hybrid Approach
As a financial advisor, you’re likely used to a combination of methods. . But business valuation isn’t always an exact science. Taking a hybrid approach by combining the above methods might give you a comprehensive understanding of your company’s value. The most important thing to remember is that your value even if you are on a W2 platform may be far greater than what you may think.
Find the Right Strategy
We hope you enjoyed learning more about how to determine how much your financial advisor business is worth. At Bridgemark, we understand your business. We can help you in the valuation process or with other critical questions as you evaluate your financial advisor business. Contact us today and we can discuss how to help you reach your fullest potential