The Valuation Trap: Why Market-Based Multiples Alone Miss the Mark

So I’m checking into a conference recently, and as I’m wrapping up at the hotel front desk, an advisor recognizes me and asks if he can have a word—confidentially. Of course, I say yes, asking for a quick moment to finish checking in, and then I walk over.

He’s standing there as if the house is on fire—clearly holding onto a burning question, something urgent. And then he asks, 'Ray, I’ve been offered 7Xs for my business. Is that a good number?'.

I pause and ask, '7X what?'
He blinks and says, 'What do you mean?'
And I respond, gently, '7X revenue? EBITDA? EBOC?'
He shrugs and says, 'I don’t know.'

Now, that response may seem surprising, but it’s far more common in our industry than we’d like to admit.

Today’s article aims to clarify that confusion, because comparables—those flashy multiples we all hear thrown around—can actually do more harm than good when misunderstood or misapplied.

We’re rethinking comparables—why they’re not as reliable as they seem, where they go wrong, and how to ground your valuation in reality, not rumor. If you’ve ever been curious—or confused—about what your firm is really worth, this one’s for you.

One of the most common methods for establishing an advisory firm’s value is using market-based multiples—metrics derived from comparable businesses within the industry. While this approach is simple and easy to apply, it frequently fails to account for several unique firm characteristics, and the reliability of the data used to determine these multiples often presents challenges. As a result, we believe that a far more nuanced approach is essential to ensure valuation accuracy.

How market-based multiple work

Market-based multiples are valuation ratios derived from metrics such as earnings before interest, taxes, depreciation, and amortization (EBITDA), revenue, or assets under management (AUM). These multiples allow investors and analysts to evaluate the relative value of firms deemed comparable due to shared operational, structural, and strategic characteristics. While analysts often disagree on what constitutes comparability, generally, firms of similar size operating within the same industry serve as a starting point for defining a relevant set of comparable transactions.

Suppose the XYZ advisory firm has revenues of $5 million and is valued at a multiple of 10x EBITDA. In that case, it stands to reason that firms with similar revenues would also be ascribed a valuation of 10x EBITDA.

3 key challenges to data reliability

1. Limited comparability: advisory firms often differ significantly in their scope of operations, client demographics, compensation models, and geographical focus. Comparing the value of a boutique wealth manager serving UHNW families in Silicon Valley with a money manager catering to mass affluent retirees in Florida is nearly impossible due to these vast differences.

2. Variability in reporting: Two similar advisory firms may differ significantly in how they report earnings and revenue data, leading to major inconsistencies when calculating multiples. One firm might include non-recurring revenues while another excludes certain costs, and different operating models treat revenue and expense reimbursement differently, thus skewing their comparative multiples.

3. Market perceptions: Market sentiment can heavily influence advisory firm multiples. Historically, there has been a tendency toward pricing premiums that align with market peaks and pricing discounts corresponding to periods of market underperformance. Relying on historical multiples, therefore, can lead analysts to overvalue or undervalue a firm unfairly.

Unfortunately, the prevalence of these reporting discrepancies makes it extremely difficult for analysts and investors to obtain accurate valuations from standard financial databases.

Advisory valuation best practices

In light of these challenges, analysts and investors need to adopt a more hands-on approach to valuation by utilizing the following tools to address transaction data shortcomings:

• Custom data collection involves gathering specific financial information directly from companies or negotiating access to more detailed data that includes adjustments for owner compensation. At ClientWise, we retain proprietary anonymized data models specifically for this purpose.

• Industry benchmarks—Establishing benchmarks for owner compensation within specific industry segments can help create a more standardized approach to adjustments. However, make sure you know whether the benchmark applies to adjusted or unadjusted raw data.

• Discounted cash flow – At ClientWise, we strongly advocate using this approach to establish current value as it avoids cross-contaminating observations about revenue, expenses, or income; instead, it focuses on the company itself and allows for greater granularity and specificity in the assumptions needed for accurate reporting. Establishing a clean baseline leads to a more effective and consistent measure of value moving forward. Pricing multiples, such as EBITDA, Revenue, and Assets Under Management (AUM), become meaningful when placed within the context of the initial valuation.

Of course, using discounted cash flow (i.e., the Income Approach) isn’t a foolproof method, as certain factors can be manipulated to influence valuation outcomes. For instance, incorporating growth rates that are significantly above market expectations will lead to an inflated valuation compared to industry peers. Similarly, excessively optimistic expectations for profitability ratios can further distort valuations derived from this method.

The necessity of enhanced due diligence

Reconciling valuations is critical yet often overlooked by many parties involved. Understanding the core value drivers of a business is essential for accurately assessing its worth and avoiding misunderstandings or disputes later on. When valuations are conducted without a thorough examination of the underlying assumptions and inputs, it creates ambiguity, which can lead to conflicts during negotiations or when justifying the valuation in a market transaction.  

Advisors engaging in the valuation process, can become emotionally invested in a valuation outcome, especially if it aligns with their retirement goals. Once an inflated value, influenced by inaccurate market pricing multiples, is published, it establishes a benchmark that sellers cling to.

Supportable and meaningful valuations require genuine transparency: stakeholders must understand the rationale behind the numbers, methodologies, and assumptions. This is where independent due diligence plays a crucial role, ensuring that all parties have a clear and justifiable basis for the valuation, which, in turn, fosters greater trust among buyers and sellers.

It's an intensive process that often serves as a major hurdle in deal-making. According to the 2023 RIA Report, fewer than half of all potential transactions survive the due diligence process. To avoid deal termination, both parties need to be proactive and honest about valuation inputs, potential red flags, and how these elements contribute to the overall business valuation. Between today and the deal signing day lies a minefield of data for due diligence to uncover. Therefore, there’s no value in setting an unreasonable comparable or using inflated growth assumptions. They are merely low-hanging fruit for a due diligence team.

Conclusion

Relying solely on market-based multiples to assess valuation in the financial services industry presents significant challenges and risks. Due to the inherent unreliability of the data and the complexities of comparable firms, analysts must tread carefully. By implementing a more nuanced approach that combines various methodologies, considers industry-specific metrics, and enhances due diligence, buyers, sellers, and investors can strive for a more accurate and informed understanding of a firm’s true value. In an industry where the stakes are high and conditions can change rapidly, this thorough analysis is essential for making sound valuation decisions.

COACHING QUESTIONS

1. How are you educating your next generation of leaders and owners to understand the assumptions driving your firm’s valuation—and their role in shaping those assumptions in the future?
2. What valuation methodologies are you using today, and how might they evolve as your business model, client base, and strategic goals shift over time?
3. In what ways are you preparing your team to interpret and articulate your firm’s value beyond just the financials—highlighting client impact, cultural strength, and long-term sustainability?
4. What steps can you take over the next 12–24 months to ensure your valuation inputs are clean, current, and fully supportable in a future transaction or transition event?
5. How will your firm’s value story change as you grow—and what narrative are you equipping your team to tell prospective partners, buyers, or successors?

About ClientWise LLC

ClientWise is the premier business and executive coaching firm working exclusively with financial professionals. We specialize in helping clients optimize growth and maximize revenue by engaging as a knowledgeable partner in accomplishing specific and significant business results. Our full-service coaching program empowers financial advisors, wholesalers, managers and executives to enhance performance through customized, action-oriented solutions based on each client’s specific vision and situation.

Our certified coaches are members of the International Coach Federation (ICF). They adhere to ICF’s strict code of ethics and have the experience and insight to work with you on the unique challenges and opportunities you face each day.

Drawing from an in-depth knowledge of the financial industry, ClientWise’s mission is to professionally develop industry leaders and consistently raise the bar for industry service, commitment and integrity. Simply put, our singular focus is to help you get clear, get focused, and get results.