What's a Financial Advisor's Business Really Worth?

One question that I’m frequently asked during our Succession Planning seminars deals with how to properly place a value on a financial advisor’s book of business. Many industry articles and various books may suggest using a general industry valuation to determine the approximate value. But an approximate value is exactly that, an approximate value that can be too high or too low.

In my opinion, one of the worst things that a buyer and seller can do is to assume that a general industry valuation such as 1.5 times gross revenues or 3 times recurring revenue is the proper value of a business. The problem with using a general valuation is that it assumes that all financial advisor businesses are identical.

Where to Start

The first place to start to properly determine the value of any business, and a financial advisory business is no different, must be based on proven financial and accounting models. From here, other tangible and intangible factors must be considered before you can determine a final value.

From a buyer’s perspective, he or she should be looking at the income and expenses of the business. A number of factors should be considered such as:

• Will the buyer need to hire a junior advisor to help manage the book?
• Will more office space be required?
• Financing costs?
• Do any expense obligations have to be assumed by the buyer such as leases, rents, staff etc.
• What growth can the buyer expect?
• Can the buyer expect to make a profit?

Other Considerations

Other important considerations from a buyer’s perspective should focus on the quality of the book from a compliance standpoint and the length of time and commitment the seller is willing to provide to transition the book to the buyer.

The buyer should make a point to speak to the advisor’s compliance department, with the seller’s permission, to ascertain if the advisor has had complaints, lawsuits, compliance infractions or disciplinary problems. A clean compliance bill of health could add thousands of dollars of value to a book.

Secondly, if a seller is retiring and moving to Florida within two months of the closing date versus a seller that is willing to stay in town for a one to two year period to help transition the clients to the buyer, which book should be considered more valuable?

What Should a Seller do to get the Maximum Value from the sale of their business?

The first thing that a seller should do is to put themselves into the buyer’s shoes to prepare their business for sale. Knowing what a buyer will look for should help the seller in positioning their business. This could take several months or years to put into place. As an example, if an office lease is maturing, it may make more sense to not lock in for a long period of time if a sale is imminent.

Using the Proper Valuation – Discounted Cash Flow

I believe that the proper method to value a business is based on its current financials with some projections for future growth. One of the best methods to use is the Discounted Cash Flow (DCF) method. The DCF method takes several factors into consideration and when used properly, will accurately illustrate the true value of a business which in many cases can be higher then what a general industry valuation or multiples may assume.

Precautions in using the DCF Method

The DCF method is as accurate as the information that is feed into it. As an example, certain assumptions must be made such as annual revenue growth rates, a perpetual revenue growth rate and the cost of financing. It is best to use the growth rate that the book has experienced over the past three to five years.

Final Thoughts

The seller should consider engaging the services of a business valuator or an accountant with experience in business valuations. The expense of a business valuator can range from $5,000 to $20,000 but could be a very worthwhile exercise for the seller in that minor adjustments can be made to increase the value and the seller has a credible 3rd party valuation that can be presented to a prospective buyer.

In closing, selling a business takes some effort and proper planning. If you’re thinking of selling your business, you would be prudent to plan your exit strategy about three to five years from the time you wish to be fully retired. In other words, if you want to be vacationing in Florida on your 65th birthday, you should start your planning around your 60th birthday. Proper planning upfront will help to ensure that you’re selling one of your most valuable assets to the right person at the right price.

Vince Valenti is the president of Independent Planning Group Inc. (www.joinipg.com) and the president of Brigata Capital Management Inc. (www.brigatafunds.com) . Visit our blog at www.mindyourownbiz.ca