What is your business worth?
Every business is built to be sold
"Every business is built to be sold" isn't just a saying. It's valuable advice for all business owners, including financial advisors.
A financial advisor's role is to be a life-long planner - not merely a shortcut to build a nest-egg. That planning extends to the advisor's own financial future, and that includes the sale of their business.
In this article, we will look at ways to answer common questions around such a sale:
- How do you value a financial advisor business?
- How would a financial advisor increase the value of their business?
- How do you prepare a financial advisor business for a sale?
- What business valuation calculator is good for financial advisors?
Every investment of effort contributes to your enterprise value
While most business owners think about fundamentals like EBITDA, there is more that needs to be examined.
Consider all options when thinking about selling the business. Financial advisors should build out their intellectual property (IP), and document their systems, using a proprietary playbook. The playbook should encompass their approach to client management, investment strategies, financial planning and the goals and execution of the overall client experience.
Valuation by a third-party consultant is important, but these valuations provide an estimate, and may not give a perfectly accurate representation of market value, but it is a solid starting point. Taking the business to the market and seeing what offers arise is the only way to determine the true value. Someone will put an offer on the table. The market will reveal the truth.
How Does Valuation Occur - How do you value a financial advisor business?
Begin assessing the anticipated value of your practice by considering factors such as recurring revenue, client demographics, assets under management (AUM), and growth potential.
Consider the (T.O.P.) Framework: Tidy, Orderly, and Proprietary
- Tidy: How well-organized are your business operations and finances? Are your P&L statements clear, and do you track metrics like EBITDA?
- Orderly: Do you have contracts, agreements, and business structure documentation in place (e.g., employment agreements, client confidentiality, etc.)?
- Proprietary: What makes your practice unique? This could be a client acquisition model, branding, or a process or that only your firm offers.
Get a detailed checklist of these preparation steps when you reach out for a free consultation with JPTD Partners.
Factors that drive higher value - How do you prepare a business for a sale?
As you look at selling your business, maximizing the valuation"or multiples"will become your focus. Multiples are typically expressed as a factor of revenue or earnings, and are a key measure used by potential buyers to assess the value of a business. To achieve the highest multiples, you must strategically position your firm to appeal to buyers. In this guide, we'll walk you through ten tips to help maximize your multiples.
How would a financial advisor increase the value of their business?
- Organic Growth - A strong growth trajectory shows buyers that your business is not only healthy but also scalable. Demonstrating that you can consistently bring clients into your practice organically can add a multiplicative effect on your practice. This may be from a social media system, a seminar system, or CPA alliances, but the key is that your practice can grow both up-and-down-market.
- 85% Recurring Revenue - Predictability is a key factor in valuation. Strive to have at least 85% of your revenue as recurring, such as fees from assets under management. High levels of recurring revenue reduce risk for buyers and often result in higher multiples, as they provide a steady and reliable income stream post-acquisition.
- Run it like a Business, Not Just a Practice - Transforming your practice into a well-run business is crucial. This involves establishing efficient processes, robust systems, and clear governance structures. Buyers are more likely to pay a premium for a business with standardized operations and a professional management team, as it ensures continuity and scalability.
- G2 Leadership in Place - Having a second generation (G2) of leadership ready to take over is highly attractive to buyers. It reduces the perceived risk associated with the transition and ensures the longevity of the business. Groom your G2 leaders early, involve them in decision-making, and make sure they are well-known to your clients.
- Generational Strategy for an Older Client Base - If your client base skews older, develop a generational strategy that ensures continuity. Buyers will value planning that transitions wealth management to the next generation, retaining assets and relationships. This strategy should include engaging with clients' heirs and introducing services tailored to younger generations.
- Offer Comprehensive Financial Planning - A business that offers comprehensive financial planning, rather than just investment advice, is more likely to command higher multiples due to its deeper client relationships and diversified revenue streams.
- Own the Clients - If under an OSJ Model - If you are in an OSJ model where you receive overrides, it's critical to ensure that you own the client relationships. Ownership of clients' contracts directly impacts the valuation, as it guarantees that the buyer will retain control over these relationships post-sale.
- Desire to Stay Involved Post-Sale - Buyers often value continuity in client relationships and business operations. Expressing a desire to remain involved in the business for 5-7 years post-sale can significantly increase your multiples. This involvement ensures a smoother transition and mitigates the risk of client attrition.
- Clean Compliance Record - A spotless compliance record is non-negotiable. Any blemishes can drastically reduce your multiples or derail the sale altogether. Regularly audit your compliance procedures and address any issues promptly to maintain an impeccable record, which is a key factor in enhancing buyer confidence.
- Your Business is Systematized - Can you leave your business for two months and it will run just fine without you? Many advisors believe that their "holistic" form of financial planning or their money management system will add to the value of their business, but what's more important is that you have processes, systems, and procedures that ensure that the business can run just fine without you.
What business valuation calculator is good for Financial Advisors?
As a first step, learn what the estimated value of your business is now. We recommend JPTD Partners' business valuation: Get my business valuation
Financial Advisor Coach | Author | Speaker
