One of my mentors, a very successful founder of a privately-held advisory firm, would often share the lessons and principles that he gathered over his 35-year career as an entrepreneur.  One of those nuggets of wisdom was:

“We have to run our business as if it was for sale.  Even if we never sell, we can go to bed every night knowing we are doing right by our employees and owners today.” 

Essentially, his message was: “Wouldn’t you want to do things that make your firm more valuable every day, rather than just when you want a third-party to place a value on it?” 

The rationale is simple. All of the factors that potential acquirers expect or value are the same as those that will benefit your firm’s owners and employees today.  Likewise, if businesses wait to adopt this attitude until right before they are contemplating a merger or acquisition, sophisticated suitors will pick up on this and view your efforts as a “fresh coat of paint” rather than a long term way of doing business.  (Think about the last time you walked into an an open house and wondered why the furniture was so sparse and why the house smelled like fresh-baked apple pie.)

Increased focus on “enterprise value” in the wealth management industry is a very positive sign for many reasons.  First, firms with capital to deploy recognize that some wealth management businesses have enterprise value, or the ability to produce economic benefits to owners beyond the careers of their founders. (And they are willing to pay a multiple that exceeds that of transferring a book of business.) Second, the dialogue that accompanies this topic brings to light best practices that are in the best interests of not only potential acquirers, but also current stakeholders of your firm today.

The factors that influence a wealth management firm’s enterprise value are relatively simple. (It’s the application of these factors to determine a valuation that is more complex.) The value of your firm is a multiple of the present value of its future cash flows.  These cash flows (profitability) will hopefully grow at a certain future rate (expected growth rate), and will carry some degree of uncertainty (risk).

With respect to the multiples used to value wealth managers, this is a topic that deserves much more detail than we could address here. Multiples vary greatly based on the supply-demand characteristics of the market at the time, acquirer type, and the size of your organization, among other factors. For this reason, do not rely on anecdotal data or averages that you will come across and assume that these multiples apply to your firm.  In almost all cases, it won’t.

It will be much more effective for you to focus on the valuation factors that you can control. Here are a few examples of initiatives that will improve each of these factors for your firm.

 

Profitability: Improving the Efficiency and Effectiveness of Your Firm

●      Adopt a strategic approach to the technologies that you employ by emphasizing training, adoption and usage, as well as periodically reviewing additions or alternatives to your current technology suite.

●      Conduct routine strategic planning sessions to add structure and deliberateness to the time you devote to managing your business.

●      Improve the productivity of your team with formal role definitions, career paths and incentives.

●      Create alignment across your resources and activities by ensuring that you have the right people doing the right things

●      Conduct a client profitability study so that you can understand and monitor profitability at the relationship level.

 

Growth: Building a Track Record of Growth that is Repeatable and Sustainable

●      Devote resources to strategic marketing planning to improve the effectiveness of your sales efforts.

●      Perform a client segmentation analysis to understand the characteristics of your most attractive relationships.

●      Define a clear target market to focus your efforts.

●      Develop and nurture brand equity that will outlive your founders.

 

Risk Management: Minimizing Reputational, Legal, Financial, Regulatory and Operational Risk

●      Analyze and document your critical processes to improve quality and repeatability.

●      Ensure that you have devoted enough resources to your regulatory obligations and foster a “culture of compliance” so that everyone on your team is sensitive to (and supportive of) these obligations.

●      Develop a simple human resources manual that defines your HR policies and procedures.

●      Objectively measure and monitor the health of your client relationships.


Now, some readers may be thinking “I’m dying with my boots on.  I’m not interested in my enterprise value today or in the future.”

The fact of the matter is that this framework and these practices will benefit every firm. Rather than seeking to maximize the value of their firm, many closely-held wealth management firms elect to take a “lifestyle practice” approach that emphasizes year-over-year cash flows that accrue to its owners.  And that’s fine.  Regardless of whether your goal is to pay out cash flows to your owners or to monetize them at some future point, the principles remain the same.

Utilizing this “Profitability-Growth-Risk” framework and implementing some of these initiatives will help your leadership team maintain focus on what it can control to improve results, as well as the value that you bring to your clients and employees today.

Chris Winn and Brian Lauzon are managing principals of AdvisorAssist, a management consultancy for investment advisory firms.