Businesses everywhere – including financial advisory firms – are contending with market volatility, economic upheaval and the rising cost of capital. This environment exacerbates the difficulties for financial advisors contemplating a sale and looking to go to market with a proper valuation on their practices. There have always been challenges to sticking the landing on valuation. However, just as business models have evolved, so have the approaches for valuing them.

Despite the macro-obstacles, there is no shortage of buyers anxious to scoop up a strong business. And, with an aging advisor demographic, increasing regulatory burdens and compressed fee frameworks, there is no shortage of sellers looking to extract value from their practice.

There’s not a shortage of acronyms in play during the valuation process, either:

  • EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization
  • EBOC – Earnings Before Owner Compensation
  • DCF – Discounted Cash Flow

There are other approaches to consider in the valuation arena as well: A revenue multiplier has been the historic “go to” for valuing an advisory business. If only it were that simple. Multiplying your firm’s trailing revenue by a multiple (using, for example, the industry average of 2 – 2.5) to arrive at a value for the firm, may apply for some smaller practices but is generally too basic a technique. The drawback: it fails to consider profitability and the nuances of operations, perhaps limiting the pool of interested buyers.

Calculating the present value of income attempts to project firm revenue a decade into the future. The data is calculated to estimate the firm’s value in accordance with anticipated costs and expenses over the decade. Though fairly accurate, the results are somewhat difficult to calculate. Additionally, subjective components used in the methodology will shape the outcome.

As for the other methodologies mentioned above, each has its benefits and disadvantages.

While there’s not a lot of “DA” to consider when using EBITDA to assess a book of business, it remains a solid assessment of a practice’s ROI (return on investment). And, while EBOC is a good measure of a firm’s potential performance with its owner gone, none of the techniques above account for other characteristics that buyers value, such as revenue diversity, client age, historical growth rate and more.

DCF suffers from the same issues, with the added drawback that its determination of a practice’s value relies on estimates of future cash flows… an imperfect science at best.

This is all to say that valuing a practice is a complicated equation that relies on a number of factors; Still, there are steps you can take to fill in the gaps and increase valuation in the run up to looking for a buyer… as long as you focus on items that will move the needle.

How to Maximize Your Valuation

Characteristics that buyers screen for, which will impact the value of a practice, include:

  • Is there an existing next-generation advisor presence at the firm?
  • What is your revenue mix – is it diversified?
  • What is the average client age?
  • What is the portfolio management philosophy and performance?
  • Is there a client niche that is serviced?
  • What is the service model… does it rely heavily on the presence of the owner/advisor?
  • How scalable is the practice?
  • How likely are clients to remain with the firm once the owner/advisor leaves?

None of these are quick fixes. That’s why the old adage “begin with the end in mind” should always inform every action taken that impacts your business and your clients.

Timing Isn’t Everything… But There Is a Window of Action

Before delving into this, it’s important to remember that you don’t necessarily need to leave your business once you monetize it. A partial sale – which allows you to extract value from your practice while continuing to service your clients – can be a best-of-both-worlds scenario that keeps you in front of your clients and relieves you of some burdens associated with entrepreneurship. Plus, when you are ready to fully leave the industry, you have the opportunity to monetize your life’s work again.

What is certain is that today’s buyers take a 360-degree treetop view of every practice they are considering. Importantly, in the years prior to a sale, the ball is in the seller’s court to make changes that can increase the value of the business. However, remember a buyer is going to look at the previous three-to-five years in determining price.

It’s difficult to take a step back to objectively evaluate your life’s work. That’s why it is essential you work with a consultant who can offer you the help to find the right strategic partner through a program of curating, evaluating and negotiating possible solutions. Running the risk of underpricing your business and leaving money on the table or overvaluing it and pricing yourself out the market is too big a risk to take when the stakes are high.

Bridgemark Strategies: Expertise in Your Corner

Our experienced consultants have developed monetization strategies to gauge the true worth of financial advisor practices and other businesses. Our team is here to help you pinpoint the actual value of your financial advisory firm, plan for succession or position your company for a lucrative acquisition.  If you are considering business succession or the sale of your firm, we will help you navigate this complex maze, ensuring you receive fair value.

Contact us at 704-288-4008 or to find out more about our team, our monetization strategies and our comprehensive consulting guidance, or to schedule a no-obligation consultation.