How can you determine the value of your book?
As good as you may be at crunching valuation numbers for the companies or funds you invest in, determining how much your own advisor business may be worth often doesn’t come as easily. If you’re considering selling your practice, though, you’ll want to have some idea of its value – in part to know whether you’ll fetch enough to fund your own retirement, but also to see what steps you may need to take today to generate a higher price.
How can you determine your company's value? We explain.
Review your Recurring Revenues
While every buyer will value a prospective business somewhat differently, putting their own emphasis on various parts of the business, you can start by looking at recurring revenue to come up with an initial idea of a price.
According to John Novachis, Executive Vice President of Corporate Growth and Development at the Investment Planning Counsel, at a high level,
advisory businesses often sell
between 2 and 3.5 times that figure. Where you may fall in that range, however, depends on several factors, such as the draw rate of assets coming out of a portfolio and average account size. A potential buyer will also scrutinize fixed operational expenses, such as office space and what you’re paying staff.
2x to 3.5 recurring revenue:
The general selling price for advisor businesses
Saying that, Novachis points out that it’s hard to come up with a single figure on your own because of all the variables that can influence your selling price. "Determining the value of your financial advice business is a combination of art and science," he explains. “The science is the quantifiable variables, and the art is how well the business is run.”
Start with the end in mind
Even if you could nail down an exact figure, it may not be enough to sell. That’s why it’s important to think carefully about how much you might need in retirement, whether that involves buying a beach house in Maui or spending more time with your grandkids. It’s no different than determining your clients’ post-working dreams.
The number you land on has to support your future plans. If your business is worth $2 million today, but you want $3 million from the buyer, you should consider how to close that gap. That might mean increasing client acquisition, reducing costs or improving practice management.
Importance of Quality and Efficiency
The value of your business goes beyond the hard numbers – buyers are also looking for quality. “A lot of people think that if they just get to a certain revenue level, somebody is going to give them what they want, but those days are gone,” Novachis notes. “There’s more choice available for buyers, and they’ll discount you if you’re not running a good practice.”
If a buyer has to do a lot of work to clean up your book, your practice isn’t going to be as valuable as a similar-sized operation that’s run more smoothly. A defined investment philosophy, a positive and repeatable customer experience and an efficient process can all work to increase the valuation, he says.
Determine your Transferability
One way to think about whether you could get what you want from a sale is to consider what would happen if you spent two weeks away on a vacation without access to your phone or computer. If everything would fall apart without you, that’s a red flag for potential buyers.
An easily transferable practice – one that can run without the founder – is far more appealing, no matter how promising your revenue growth prospects might be. Buyers, says Novachis, value infrastructure like a professional office, consistent processes and experiences for your clients, and well-trained support staff. "This is a volatile, market-sensitive business, and that's why scale and efficient are very important," he explains.
"This is a volatile, market-sensitive business, and that's why scale and efficiency are very important." - John Novachis
Focus on today
Unlike in a traditional business, the buyers in this sector aren’t necessarily looking for you to come up with some grand growth plans. While that does have value in a typical M&A setting, with advisor firms, buyers, for the most part, already know what it takes to grow a practice. “I don’t need to know what the advisor thinks the business is going to do in the future because I’m going to run it, and I know what I can do,” says Novachis.
Evaluate your Client List
Still, buyers do want to see healthy client list that they can then grow. Many will evaluate the average age of your clients to see if there’s potential to deepen relationships and expand services, such as retirement planning, insurance sales and inter-generational wealth transfers. Client satisfaction and retention are also important to increasing valuations – no one wants your clients to leave right after the sale.
Consider What Matters Most
When it comes time to sell, money may not be everything. For instance, some firms might offer you more in exchange for putting client assets into proprietary funds. That may not be in your clients’ best interests. "Most advisors want to do right by clients and staff and have a win for them, too." Novachis says. Ultimately, your personal values may play a critical role in determining how much you get - and want - for your business .
Prepare for a Successful Sale
Since no two businesses are alike, valuing your advisory practice requires an analysis of what makes your business uniquely attractive to a potential acquirer. Considerations like recurring revenue, operational efficiency, client demographics and your personal values all play a role in determining the final number. The good news is that there are tangible steps you can take today that will enhance your valuation when it’s time to sell. Streamlining processes, cultivating client loyalty and putting systems in place to ensure transferability can help improve your valuation in the future.
If you're thinking about succession and want to learn more about maximizing the potential of your business, reach out to us for a
no-obligation, confidential conversation with one of our industry-leading experts .
