Nicholas Gudz, Co-founder and Managing Partner, Succession Link
When preparing your financial advisory practice for sale, one of the most challenging aspects of the transaction is coming up with a proper value. If you are like many financial advisors, you may not have considered how much your practice is worth, particularly if you have had your head down building your business and servicing your client’s needs.
Service businesses, in particular, are hard to stick a price tag on because their value is based on a variety of different assumptions, as well as speculation on future earnings. Overprice your firm, and you may have a hard time finding your ideal buyer. Undervalue it, and you can leave up to 30% to 40% of its fair market value on the table for a practice that you spend years building.
GROSS REVENUE MULTIPLIERS ARE ONLY A GUIDE
One of the biggest misconceptionsin our industry today is that the proper way to value a practice is by using agross revenue multiplier. 2X grossrevenues is the industry standard “rule of thumb.” THIS APPROACH IS A BIG MISTAKE! The problem with gross revenuemultipliers is that it oversimplifies the process. Every financial advisory practice has aunique set of characteristics, such as client demographics, asset mix(fee-based vs. commission) and operations (advisor centric vs. team based).
To rely upon the gross revenuemultiplier as the only factor in the valuation of your practice is akin totaking the average price per square foot in your zip code and using that as thebasis for valuing your home. In realestate this approach disregards whether your home is built on a big lot or asmall lot, up-to-date or untouched for 25 years, or located on a quiet cul desac or next to a major inter-state. Like residential real estate, there is toomuch variability to rely just on one rule of thumb when valuing your advisorypractice.
THE EVOLUTION OF PRACTICE VALUATION
Over the last decade the financialadvisory business has evolved from the transactional oriented business modelsof the 1980’s and 1990’s to the more client centered fee based revenue modelsso prevalent in the new millennium. Withthe shift in revenue models, practice valuation techniques have also evolvedmoving away for the simple gross revenue models to an all-encompassing approachwhich takes a number of variables into account for each practice valuation.
Inaddition to the quality of practice cash flow, proper practice valuation alsotakes into account two other main factors; the risk of transitioning clients toa new advisor as well as the demand of the local marketplace. Otherconsiderations include the length and terms of financing to come up with arealistic market based value.
GET PROFESSIONAL HELP
The good news for advisors is thatthere has been a lot of practice sales over the last five years and because ofthese transactions there exists a good deal of information that help businessesto properly determine value. As we have discussed in previous posts, advisors contemplating a sale oftheir practice would be wise to build a sales advisory team that consists ofattorneys and accountants to help with the sale. We advise looking for professionals that haveexperience with advisory practice sales and proper valuation techniques. They will possess the raw data that you needto set an appropriate price. You canexpect to pay anywhere from $1,000 to $6,000 to get the job done properly.
While a few thousand dollars represents a small price to pay for peace of mind, there are alternative options available; Succession Link offers a complimentary valuation service to any advisor who lists their practice in the online marketplace at SuccessionLink.com. As the pressing issue of succession planning is acknowledged with greater frequency by financial services professionals, it won’t be a surprise to see the demand for valuation services grow significantly in years to come.