Prices for adviser practices aren't as high as most expect, but some factors can boost value

Though it's a seller's market, firms haven't seen the run-up in prices they did between 2006 and 2008

Mar 15, 2015 @ 12:01 am

By Liz Skinner

Even though the number of prospective buyers greatly exceeds the number of financial advisory firms on the market, owners often have unrealistic ideas about what their businesses are worth.

About 28% of advisers sought to buy a firm in the past two years, compared with just 4% who tried to sell, according to the 2014 InvestmentNews Financial Performance Study of Advisory Firms.

Those numbers are expected to rise to 33% and 5%, respectively, over the next two years.

Though it has become a seller's market, financial advisory firms in general haven't seen the run-up in prices they did between 2006 and 2008.

On average, advisers who want to sell their practices estimate they are worth 2.8 times total revenue, according to Cerulli Associates. But last year, buyers paid about 2.2 times annual revenue for practices, the research firm found.

Geoff Frazier, president of Global Financial Private Capital, estimates advisory firm transactions are being priced between 2 times and 2.75 times trailing 12-month recurring revenue.

Jon Moore, who merged Moore Financial Group with EP Wealth Advisors in January, wanted a trusted partner to take over the business he bought from his father, who had started it.

Mr. Moore said it probably was easier for him to have practical expectations about pricing. Founders are typically more sentimental about the business and as a result tend to have inflated expectations.

“In my situation, not being the founder, it somewhat removed me from the emotional aspect,” he said. “I could evaluate the transaction more objectively on its own merits.”

But that's usually not the case.

“Most people don't have any idea how valuable or not valuable their practices are,” said Drew Horter, founder and chief investment strategist of Horter Investment Management.

Certain premiums and discounts factor into whether a firm is priced at the lower or higher end of the range, Mr. Frazier said.

In addition, firms that have developed a succession plan including enough time to build out the more-valuable aspects of the business can pump up their price.


According to Mr. Frazier, the first step is to make sure the adviser's practice looks like a formal business rather than just a lifestyle practice.

That includes having certified technology and established processes and procedures. Financial records should be systematized, and advisers should have them audited, at the very least by a local accountant, Mr. Frazier recommended.

Another important step is to ensure that client records and other historical data are in a format that's easy to use and that can be transferred seamlessly.

For instance, Mr. Frazier said, an adviser who uses a proprietary client relationship management system would be a less attractive purchase target. That's because the buyer wouldn't be able to export client data without difficulty and the potential for errors, which in turn slows the integration.

In terms of the firm's financials, advisers can enhance earnings by making sure any “personal expense leakage” — such as costs for personal automobiles, supplies or entertainment — is cleaned out of the business, he said.

Buyers will want financial statements to show substantial assets under management and fees generated, according to Mr. Horter, whose firm has $1 billion in assets and oversees a group of affiliated advisers across the U.S.


Advisers also should analyze their client base.

According to Mr. Horter, buyers desire “sticky” clients and value low attrition rates. They favor firms with clients of different ages to ensure a healthy combination of those in the accumulation and decumulation phases of life.

Buyers examine the investment mix of clients to assess volatility risks, he added. For example, asset allocations heavily invested in equities could face major drops in down markets, with a commensurate drop in fees to the adviser.

And buyers will ask for an estimate of the firm's new-client acquisition costs, such as marketing, business development and events.

Advisers should think about their processes and documentation concerning contact with clients.

Is there a formal communications strategy, with regular and frequent touch points? Buyers like to see this, Mr. Horter said, because it suggests the adviser's relationships with clients run deep.

Sellers also may be able to enhance the value of their business if they have administrative staff and a compliance officer willing to stay with the firm after a sale.

Such continuity makes clients more comfortable and can help the buyer retain them through the transition.

Another consideration for buyers is whether the advisory firm has multigenerational relationships with clients' families.

The Cerulli report said sellers intent on maximizing their business' value should be engaging clients' children and grandchildren to ensure that assets remain with the firm when wealth is transferred to the next generation.


Finally, buyers and sellers will be concerned with a good cultural fit, according to Patrick Goshtigian, president of EP Wealth Advisors. His firm's dozen advisers manage about $1.9 billion in client assets.

“The most important factor to getting a deal done is the all-around culture and services the firm provides to clients,” Mr. Goshtigian said.

While the financial aspects of an adviser's business are important, buyers most likely can improve those parameters by contributing scale, he added.

Changing the culture to which advisers and staff have grown accustomed is much more difficult. Sellers can help facilitate a good cultural fit if they give some thought to an ideal buyer for their firm well in advance.


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