RIA valuations too specific to base on other sales

Selling advice firms to internal successors are toughest types of transactions, experts at Schwab Impact report

Nov 15, 2017 @ 4:39 pm

By Jeff Benjamin

Financial advisers looking to catch a ride on the consolidation wave by putting their firm up for sale should be open to the reality that valuations are often more art than science.

"Stay out of the valuation trap by worrying less about what you think your firm is worth, and think about your value to a potential buyer," said John Furey, principal and founder of Advisor Growth Strategies.

Mr. Furey was joined by Todd Thomson, chairman of Dynasty Financial Partners, speaking about RIA firm valuations on Wednesday in Chicago at the Schwab Impact conference.

"If you're thinking about valuation, focus on what you can control," Mr. Furey said. "The drivers of valuation are profit rate, revenue growth, and cost control. In other words, new clients plus flows from existing clients less attrition, is what you should really be focusing on."

The pace of consolidation in the wealth management space has generally picked up over the past several years and it's projected to continue at an increasing rate. However, firm executives should not try to value their advisory businesses based on published reports of other transactions, the experts said.

(More:Fintechs producing cheaper, automated firm valuations for advisers )

"The biggest challenge we see is unrealistic expectations by sellers, which can result in lower value years down the road when they actually sell," Mr. Thomson said. "One of most important takeaways is that a valuation as an abstract number is interesting, but the real point is increasing the valuation of your firm."

In addition to emphasizing that there are multiple factors beneath the "headline number," the speakers said sellers need to understand that all buyers are not interested in the same things from a registered investment adviser.

In general terms, the speakers categorized potential buyers as strategic, including firms like Mariner Wealth Advisers, financial, such as firms like Focus Financial Partners, and peer-to-peer, which includes firms like Wealth Enhancement Group.

Asked which category of buyer tends to pay the highest price, Mr. Thomson said, "it depends."

"You have to understand the buyer and how you can structure your firm to be as attractive as possible to them," he said. "If you're a retiring adviser, a financial buyer is not interested. A strategic buyer will be looking at what is already in place, and a peer-to-peer acquisition is one of the best deals for a retiring adviser."

On peer-to-peer deals, both speakers described selling to a next generation as among the most complicated to complete. In those cases, "the buyer and seller are really tied to each other," Mr. Thomson said.

Mr. Furey agreed.

(More:Breakaway broker deals a drag on M&A activity in third quarter)

"Internal transactions are the toughest because there is so much going on," he said. "Businesses are worth wherever buyers and sellers meet, and the reality is everything is calibrated by the deal itself."

While it is difficult to apply recent or historical valuations to any existing firm, business owners should always run their businesses as if they are preparing for a sale, Mr. Thomson said.

"It's really important to have a valuation model running on your business," he said. "Whether it's paying for new technology, making investments in the business, or hiring people, it's important to ask what it does to the value of your firm. If you don't do that, I find most firms make mistakes and don't invest enough in some things, and invest too much in other things."

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