Selling a financial advisor practice is not a DIY endeavor. The valuation process might not seem that complicated at first glance, but this challenge will chew up your time and energy. You may choose to consult with an expert in order to get an accurate and fair value for your financial advisory firm. Let’s take a quick look at the best approaches for calculating fair value for your firm.
Objectively Value Your Firm
No two financial advisory firms are exactly the same. However, practice owners understand their business has both an objective and subjective value. The dollar value you assign to your practice based on your investment of time and effort is different from the value established by the market.
Use a proven methodology for your practice’s valuation and you will remove the subjective element from the equation. While a proven valuation methodology is not guaranteed to be completely accurate, it will provide a general value range to help you sell your business for a fair value.
Consider Your Firm’s Present Value of Income
One approach to valuing your financial advisor practice is to consult with an experienced accountant to calculate the income valuation methodology. The present value of income approach projects a full decade of revenue moving forward. The practice’s margin in this period of time is also projected. The annual profit is calculated considering overhead expenses and growth extrapolation throughout the period. The end result is an estimation of the firm’s value in accordance with anticipated costs and expenses across the ensuing decade.
Though this approach is likely to be fairly accurate, it is comparably difficult to calculate. Furthermore, this methodology also includes subjective components that ultimately shape the outcome.
The Revenue Multiple Approach
The revenue multiple method is the most basic means of obtaining a valuation for your financial advisory firm. Here’s how it works. Multiply the firm’s revenue in the trailing year by a multiple. The resulting figure is the value of the firm. The industry’s average multiple is slightly greater than 2.0 so it makes sense to use 2.1 as your firm’s revenue multiple.
As an example, a financial advisory firm with $1 million in revenue is worth $2.1 million based on the revenue multiple method of valuation. Though this approach is favored as it is fairly basic, it is not perfect. The drawback to this methodology is it fails to consider profitability and the nuances of operations, meaning the pool of interested buyers will be inherently limited.
The bottom line is a prospective buyer will not be as interested in a financial advisory firm with a high value based on the revenue multiple approach if its operations lack efficiency. Furthermore, this approach does not distinguish between newly-added streams of revenue such as first year commissions and recurring or fee-based revenue. This can be countered by using a multiple for the trailing year of recurring revenue and adding the figure to the trailing year of new business.
Valuation Based on Profitability and the Merits of Operations
The profit multiple approach considers the profitability and operations of the practice above all else. Such a calculation multiplies the firm’s bottom line by a multiple, typically in the range of 4 to 8or more. These valuations are also based on the size of the firm with higher multiples going to larger firms.
Recognize and Address Impediments to Valuation Maximization
Perform an honest and unbiased review of your financial advisory firm’s operations and you will find there are several factors that reduce its valuation. For example, if the bulk of your revenue is heavily concentrated or if you have a plethora of accounts that provide diminutive respective revenue streams, potential buyers might not be that interested in paying what seems to be fair value from your perspective.
Even a comparably high client age and/or the lack of tech implementation at your firm can dissuade prospective buyers from making an offer for your practice. You can do your part to improve your firm’s valuation by proactively addressing these flaws. Make a concerted effort to move next-generation clients through your sales funnel or zero in on a niche market and your firm will be that much more attractive to suitors.
Account for Clear and Latent Risks When Valuing Your Firm
There is a certain amount of risk inherent to all financial advisory firms as well as businesses in other sectors and niches. Omit the many different risk factors from your firm’s valuation and you will have an inflated number that is not rooted in reality.
Examples of risk factors include:
- Excessive financial obligations to current employees
- Liabilities such as debt or unresolved litigation
- Expenses
- Insufficient staff, especially if the business is in the midst of growth
Reassess your practice’s value with all such risks factored in and you will have a much more accurate valuation. If the ensuing acquisition offers underwhelm, there might be sufficient reason for the lowball figures.
Take a step back from your business to avoid tunnel vision. Consider why prospective buyers might consider your firm to be risky. Even something as subtle as moderate revenue growth or revenue stagnation in recent financial quarters might be construed as a cautionary red flag by potential buyers. When in doubt, consult with a business valuation consultant for a truly objective and fair valuation of your financial advisory firm.
Bridgemark Strategies is on Your Side
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.
Reach out to us today at (704)288-4008to find out more about the merits of our monetization strategies and overarching consulting guidance. You can also reach Bridgemark Strategies on the web to coordinate a no-obligation financial consultation.
