How Should Advisors Value Their Practices?

Despite knowing that many factors influence their practice value, independent financial advisors often do not know what their practice is worth. As a smart financial advisor, you want to maximize the net worth of your most valuable asset — your practice. To develop a business that has lasting value, you need to improve the value on an economic basis and increase the value on a personal basis. At the same time you should be developing a clear and detailed succession plan.

How Advisors Value Their Practices

How Should Advisors Value Their Practices?

According to a July 2012 article that appeared in Investment Advisor, financial advisors who view succession as a long-term process rather than an event can minimize the pain and maximize the gain they achieve when they finally leave the business they’ve built up over the years. Merger and acquisition professionals suggest beginning succession planning at least 10 years ahead of transitioning a practice, but only 6 percent of advisors are doing so, according to a study produced by independent research firm Aite Group. An even scarier statistic: 42 percent of advisors who are within two years of transitioning their practice to a successor lack a succession plan. While an additional 13 percent have a plan, they do not have all the elements in place to execute it. Advisors who are three to 10 years away from succession show about the same level of succession planning adoption (46 percent) as peers who will transition their practice within two years. The next generation of advisors who take over practices will benefit from a well-thought out succession plan, as will clients, who can feel uncertain transitioning to a new advisor. The sooner you start planning, the better you, the new owners and your clients will fare. The study also revealed that advisors aren’t realistic about the factors that impact practice valuation. Reliable earnings and client retention, along with allowing adequate time for the succession planning process, proved to be key determinants of practice valuation among respondents. However, the survey showed that advisors mistakenly think that Assets Under Management (AUM) is the most important factor in valuation, followed by revenue. Assets and revenue count, but normalized earnings are more important. Advisors can boost the value of their practices by paying attention to three critical factors: time, client retention and earnings before interest, tax and amortization (EBITA). Time. The more time you have before you leave your firm, the more influence you can have over its valuation. Many risks can be avoided if you start planning early enough. Planning should start at least 10 years ahead of a transition, and should include decisions on internal and/or external succession, as well as a detailed plan for the succession process. Client retention. Among the greatest risks is client retention. It’s the biggest stumbling block for advisors who acquire practices. One in three acquirers in the Aite Group survey experienced client retention of less than 50 percent — well below the ideal target rate of 90 percent. If you don’t position your practice for a high client retention rate, you’ll face buyer demands to cut your price. While 90 percent client retention may sound aggressive, it’s doable if you start planning early. EBITDA. There are several factors that enhance your firm’s earnings as represented by EBITDA. It’s no secret that you can improve your bottom line of earnings by generating more revenue and reducing firm expenses. However, fewer advisors recognize that they can help both revenue and expenses by increasing their firms’ technology efficiency. If your time horizon is less than three years, focus on reducing risks with projects such as technology integration or putting contracts in place to help you retain key employees.  Every practice owner should consider going through a business assessment and practice valuation exercise with a consulting firm that specializes in advisor practices to evaluate the current situation and identify and prioritize the areas needing attention. For more information on Summit Brokerage Services, an independent broker-dealer, visit or contact us at (800) 354-5528.   This blog and website are for informational, educational and discussion purposes only. 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