Valuing Your Business Goes Far Beyond Revenue Multiples

There’s a big difference between buying a book of business and buying a business. Acquiring a business doesn’t just require an assumption of client relationships; it necessitates a transfer of trust – something that can’t be measured using factors and formulas.

The days of calculating an advisory firm's value by simply multiplying its annual revenues by some magical multiplier (usually 2.1x or 2.3x) are an anachronism. As M&A in the financial advisory space has evolved, both buyers and sellers have become much more savvy about a host of ancillary considerations that can dramatically impact a firm’s tangible value.

Consider two similar sized advisory businesses, each generating $2M in annual revenues. Firm A is a sole practitioner who works out of his home and sublets shared office space for a Sales Assistant who has been with him for 15 years. The business has a very large roster of older, retired clients for whom they provide wealth management and income planning services. Firm B, on the other hand, has a multi-cultural and multi-generational team, a strong institutionalized client service model, and a smaller but wealthier and diverse client base. Which business is worth more? If you rely solely on metrics, they would be valued the same.

How to Value Your Wealth Management Business 

Whether you’re a potential buyer or seller, you need to look beyond the obvious tangibles and factor other considerations into your valuation. Clearly, practice management – the state of the practice, the quality of the business and how it’s run – needs to be a key area of focus and scrutiny:

• What are the skill sets and competencies of the staff that would be joining your group as part of the acquisition?
• How would those skills integrate and complement your existing team members?
• Is there a diversity of age and culture among team members?
• Does the corporate culture and service delivery model of the two firms closely align?
• Are the firm’s operational processes and procedures well-documented and repeatable?

The ClientWise Benchmark Assessment Report (BAR) can serve as an invaluable resource in evaluating your own practice to see if you’re effectively maximizing its value, or to ascertain a more accurately valuation of a prospective acquisition.

Remember too that the value of a business isn’t solely predicated on the ability of the seller to transition their clients over. It’s just as important to look at the composition of that book of business. You may have a highly motivated seller with strong relationships who can convince the lion’s share of their aging client base to move their relationships over as part of the deal. While that may be terrific in the short-run, in the long-run what you’ve essentially purchased is a dying book of business. There’s simply no future generation to speak of…either in the client base or among the team members.

Coaching Questions from this article:

1. How much is your firm worth on the open market?
2. How would you go about determining the value of your firm if a prospective buyer approached you tomorrow? And how would you go about determining a reasonable purchase price if a firm you were interested in acquiring suddenly became available?
3. What practice management and team development steps can you take to begin cultivating future leaders who will improve the long-term sustainability and value of your business?