Culture, client communication help determine firm value

Asking price is about more than merely calculating bull market-inflated multiples of revenue or earnings.

If you’re the principal of a registered investment adviser, a hybrid or an advisory firm affiliated with an independent broker-dealer, there are probably entities interested in partnering with or acquiring you.

And with advisory sector M&A again breaking records in 2021, you’ve almost certainly wondered what your firm is worth, and whether now might be the time to discuss your succession or expansion options with one of the many suitors actively pursuing financial advisory firms.

I've overseen hundreds of acquisitions as the chief operating officer at Allworth Financial, one of the fastest-growing RIAs in America, and, before that, in more than two decades as a high-growth company executive.

Aside from revenue, EBITDA and AUM, culture is one of the most important factors that we appraise when evaluating a partnership. We will not partner with firms where the cultural alignment is poor.

When we partner with a firm, we think a lot about genuinely serving each other, partners and associates, in addition to serving our clients. To do this at a high level, we want to see strong philosophical alignment on several personal and operational dimensions.  

Put simply, we seek partnerships with firms who want to take advantage of the enterprise platform for business development, financial planning, asset management, technology and all of the back-office functions. This alignment is what provides new partners the space to pursue their passions and gain a sense of freedom. For some, that’s spending more time with clients, and for others it’s new growth initiatives or mentoring less-experienced associates. Maybe it’s the next steps toward a succession solution and eventual retirement.

The fact is, no matter how successful a firm appears to be based on AUM, revenue or earnings, we’ve found certain cultures prohibitive. In fact, on more than one occasion, we’ve traveled across the country to meet with a firm, only to head back to the airport sooner than expected when it became apparent that the firm had an incompatible culture.

How do we evaluate something as subjective as culture? Bad cultures are revealed in numerous ways but can be clearly identified by things like high employee turnover, an obvious lack of morale or client retention. Even a disorganized reception area or office environment is a red flag.   

But it’s not just aesthetics, or whether the firm’s holiday party is well attended. That’s because prohibitive cultural chasms also seep into operations, HR and compliance: the inner workings of the firm. From there, cultural cancers invariably infect client communications, trust, referrals, and retention: all factors that are incredibly important to the value of your firm and future success as partner in a larger firm.

In most investment advisory firm transactions, clients must consent to the change. This is always an area of concern for any adviser considering a transaction. Many people feel that any change is scary. “How many clients will actually come with us?”

We consistently see that firms with great cultures and strong client communication processes have trusting clients who are excited to follow their adviser to a larger firm with a similarly great culture. Our experience demonstrates that a client isn’t going to jump ship just because there’s been a change to the name on the door. They know that you’ve been there for them in the past, and so when you form a partnership with another firm, they’re happy to follow you into the future. These can ultimately be meaningful value drivers for your firm.

[More: To raise your valuation, simplify your business]

Pete Engelken is chief operating officer of Allworth Financial.