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Wealth Advisors: What is Your Business Really Worth?

By Ray Sclafani | May 3, 2016

Every advisor – whether thinking about selling their firm or not – wants to know the value of their business. It’s simply human nature to be curious about how much your years of sweat equity are really worth. As one of your largest assets, it’s essential for planning purposes to have a clear idea of your practice’s value. So, how much is your wealth management business actually worth?             

We’ve all seen the various “rule of thumb” multiples that get tossed around, typically ranging from 2x to 3x gross recurring revenues. While that may be a genuine industry average, there are a host of variables that can positively or negatively impact each individual firm’s value – including historical growth rates, client composition and loyalty, a well-defined service delivery model, repeatable processes, and the quality of your team and technology.

Often, however, wealth advisor owners are limited as to how much they can generate from the sale of their firm because they wait to address succession until it’s a top-of-mind concern (typically five or fewer years before retirement).

Time: The Greatest Valuation Driver

Valuing your wealth management business

What if someone told you that you could earn 10x gross recurring revenue or an even higher multiple on the sale of your business? According to succession and valuation specialists like FP Transitions, it’s an achievable reality if you have sufficient time, a long-term perspective and a willingness to bring all your young team members on as partners in the firm.

While the actual structure and mechanisms are considerably more complex (depending on corporate structure, tax situation and financing options), in simple terms, an advisor owner with a 20-year time horizon for succession planning uses phantom stock to fully engage his or her team of “NextGen” advisors as future owners – taking out a 10-year loan to provide capital to help team members buy into the business. In exchange for the equity, team members agree to forego their bonuses, converting their entire compensation structure to salary and earning into the business as a percentage of net profits (which aligns to what their bonus would have been). Essentially, team members are investing their bonuses and trading some of that cash for stock. And once the initial loan is paid off, a second 10-year loan is then initiated to help the team buy the rest of the business.

Each firm’s value is like a fingerprint – no two exactly alike. But there’s no question that the more advance planning you employ, the greater the likelihood that you will derive maximum value from your life’s work.

Coaching Questions from this article:

  1. Do you have a clear sense of what your firm is worth on the open market? How would you go about determining the value of your firm if a prospective buyer approached you tomorrow?
  2. 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?
  3. What steps have you taken to develop a viable succession plan? If an internal sale is planned, are there funding mechanisms in place? 9 Client Onboarding Strategies for Top-Performing Financial Advisors

Topics: Business and Operations Management selling your wealth management business

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