Not too long ago, financial practice values were just a simple multiple of revenue. Depending on the book of business, an advisor generally could expect 1x to 2x revenue. But today, the best firms are looking at multiples of 10x EBITDA or higher if they can demonstrate steady, sustainable growth—especially in light of private equity money flooding into the marketplace in search of investment.
In reality, however, a valuation is nothing more than a mutually agreed upon appraisal between a seller and a buyer. It’s the various factors which drive that appraisal (click here to download a list of the 10 Value Drivers we see as most impactful) that you should be focusing your attention on.
There’s no question we’re witnessing multiple expansion at an unprecedented rate driven primarily by growth and profits—but in between those two, there’s a whole set of decisions you need to make including:
- Who is your firm built to serve?
- What is the persona of an ‘ideal’ client, and how does that translate into your P&L?
- Are you using the right benchmarks around professional staff expenses and operating expenses?
- And do you have a clear profit target?
It's a simple formula. If you’re able to continue growing your topline, continue protecting your margin, increasing your value to clients, and building a quality client roster, you will continue increasing the value of your firm—and ultimately the multiple you receive.
Heartstrings before purse strings
Before embarking on obtaining a valuation, there are three questions that every seller should endeavor to answer:
- What’s my time to exit?
- To whom do I want to sell?
- What value do I really want to extract from the business?
My advice is to always focus first on the heartstrings. Think about your clients and the impact the sale of your business will have on their lives. Which potential buyer would be of the greatest service to them? If it’s an internal team of fiercely loyal employees, partners and minority owners who know the clients very, very well, you may want to carefully consider their offer even if you have other bidders offering more. You may be able to get a significantly better deal externally, but is that truly in your clients’ best interest? Remember, these people helped build the business and are passionate about it.
Additionally, if you’re considering an external buyer, you’ll need to carefully think about your team. There’s a great piece that Mark Hurley developed several years ago called Understanding, Managing and Capitalizing on the Psychology of Buying or Selling a Wealth Manager, which explores some serious decisions that sellers need to consider.
As of the latest J.D. Power study (2019), the average age of financial advisors is about 55, and more than 20% are age 65 or older. And that number is continuing to climb. The clock is ticking, and you need to begin preparing for the eventual succession of your business now if you wish to generate maximum value while ensuring the long-term continuity of the firm. Certainly, multiple matters. But don’t allow the interests of your clients and your team to take a back seat in search of a higher multiple.
Coaching Questions from this article:
- How would you go about determining the value of your firm if a prospective buyer approached you tomorrow?
- 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?
- What steps have you taken to develop a viable succession plan? If an internal sale is planned, are there funding mechanisms in place?
- In thinking about your promise to care for your clients throughout all of life’s transitions, when do you think it would be in their best interest when you begin searching for potential buyers?
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