It’s 10 p.m. on a school night. Do you know where your business is?

Most advisors would find a respectful but insistent means of correcting a client who refuses to determine the value of their largest asset. How effective could any financial plan be without this knowledge?

Yet this is the situation in which many advisors find themselves.

Do you know where your business is? Do you know its value?

It’s normal for your business to represent 80% or more of an owner’s net worth. It stands to reason, then, that a realistic, metric-driven business valuation would be the kind of thing most owners would want to have in hand – yesterday.

An understanding of the specific levers that drive value, a scorecard indicating the firm’s “grade” for each lever, and a detailed plan to systematically improve the areas in which the business is underperforming must quickly follow.

Without a strategy to enhance market price and withdraw that wealth at the time and pace of your choosing, how do you receive just rewards from decades of hard work and sacrifice?

Like the cobbler and his shoes, many advisors who devote their professional lives to helping clients plan for every contingency have not sufficiently focused that lens on their own circumstances.

Let’s fix that.

Why Your Firm Isn’t Valued at What You Think It Is

Some will scoff: “I know what my business is worth – it’s two and a half to three times revenue.” These back-of-the-napkin calculations are based on common assumptions that don’t necessarily map to what a potential buyer is likely to pay.

Rather than top-line revenue, a selective buyer will emphasize profitability, cash flow, and the stickiness and assumed duration of your specific revenue streams.

Creating a sober assessment of these data points now affords you time to implement corrective measures if the valuation that comes out of a proper analysis doesn’t line up with your original thinking. Waiting until you’re six months out from your target transition date is simply shortsighted – an interesting irony for those who help others identify goals and take steps to achieve them.

We know that not all revenue is treated equally.

As the most obvious and often discussed example, transactional revenue is deeply discounted relative to recurring revenue. And we would all agree that a firm posting $2M in revenue with a 55% margin would fetch a very different price than a $2M firm with an 18% margin. But what other factors will open up the buyer’s wallet when you’re ready to make a move?

Key Value-drivers That M&A Specialists are Likely to Evaluate:

  • Clients connected to the lead advisor/owner rather than the firm generally
  • Clients connected to team members who will remain after the owner exits
  • Average client age and level of systematic distributions
  • Flat or negative growth trends – outflows that exceed inflows
  • Client addition and departure rates
  • Client tenure
  • AUM per advisor
  • Number of households per advisor
  • Percent of AUM with a next-generation relationship
  • An organized, systematized and, where appropriate, automated approach to the firm’s key business functions, particularly those that drive revenue and control the client experience such as prospecting, new client onboarding, and the service model for existing clients
  • The degree to which the firm leverages technology to enhance client engagement and heighten operational efficiency: workflows in the CRM, client adoption of firm portals, effective utilization of the financial planning tool, video-based client meetings, etc.

What rating would you give your firm on these points? How compelling do you believe your “report card” would be compared to other firms that a buyer evaluates? Are the results likely to elicit an offer that fairly reflects what you and your team have created over the years? Would an offer based on current circumstances reward other firm stakeholders fairly?

Find the Value of Your Firm

For the reasons mentioned above, revenue alone is a shaky foundation upon which to derive enterprise value. The methods often favored by valuation experts – those that facilitate a genuine, fact-based comparison of multiple opportunities, include the discounted cash flow method and a multiple of one of several common formulas: EBITDA, EBIT, and EBOC.

Because firm valuation is a specialized skill with significant financial consequences, you should engage the services of a valuation consultant experienced in assessing advisory firms.

Carson offers advisors who work with us access to the online valuation platform Truelytics. Based on the information you enter, this powerfully effective tool – used by over 7,000 independent advisory firms representing $300B in AUM – clearly highlights areas of strength and weakness, and provides a preliminary valuation using the discounted cash flow method.

Once armed with this information, your Carson coach can help you formulate and implement strategies to address poor grades and elevate your valuation number to the lofty heights where it belongs.

This path makes a lot of sense for advisors who are just dipping their toes into the valuation waters and aren’t yet ready to commit to a valuation consultant. (Advisor Growth Strategies, DeVoe & Company, and FP Transitions also enjoy a significant presence as valuation consultants in our industry.)

Knowing where your firm is out of alignment opens the door to making the required adjustments.

Think of it as an organizational chiropractic session! How good will it feel getting the kinks out – assertively pursuing the areas that need attention, confidently taking the right steps to maximize the value that you and your team have worked so hard for?

How Financial Advisors Can Improve Their Firm’s Value

If you haven’t already, we encourage you to take an active role in managing your firm’s value.

Rather than allowing a question mark and a head scratch to hang over your most substantial asset, request a formal appraisal by a recognized expert or work with us to leverage Truelytics. Then, adopt a project management approach to address the areas of opportunity that have been highlighted.

  • Identify the implementation specialist on your team – the person who exhibits skill at process, detail, prioritization and accountability, and who is most accomplished at getting things done. (Hint: This is very rarely an advisor).
  • Choose an online project management tool to coordinate the action plan. Carson Coaching can help you here as well. As part of our coaching process, we offer access to Asana, a leading collaboration tool that helps groups organize and execute.
  • In partnership with your implementation specialist, lead a strategy session with your team to document actions steps – the specific remedies for the challenges or gaps that are exerting downward pressure on your valuation.
  • Break down the steps above into their underlying executable activities – think tasks and subtasks: the 20,000-foot vision, 10,000-foot tasks and street-level subtasks.
  • For each task and subtask, designate an assignee and a due date.
  • As part of your weekly team meeting, the implementation specialist should gather status updates from the team and work together to complete overdue tasks.

With this knowledge and through these steps, you can align the external assessment of your firm’s value with what you feel in your heart and know in your mind is its true worth. You deserve it!

Learn how to grow your advisory firm, your team and your bottom line with Carson Coaching. Click here to schedule a complimentary consultation.

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