Buy | Sell | Value Your Financial Services Practice
The last 5 years of the Financial Services Industry has been a slow growth period for many Financial Advisors. Growing an Advisory Business organically during this period has been challenging for many Advisors.
On the flip side, new government regulations have made many Advisors simply want to exit the business. Put these 2 factors together and the business is ripe for buyers and sellers of Advisory practices.
Just like any other entity, an Advisory practice needs a valuation done by an experienced & credentialed professional and maybe by more than one. Also, there needs to be a financing conduit to provide reasonable terms for each side.
Our firm serves as a middleman, matching buyers and sellers. Below are details regarding the process.
Valuation Methodologies
- Asset-based (not used)
- Income stream (best for large practices / offices)
- Multiple of revenue (market based / comparative sales )
Valuation Factors Revenue Multiple
- What % of clientele will transition to buyer
- Factors that could impact:
- External sale (third party) vs. Internal sale (partner)
- Length of time client has been with advisor
- Amount of advance notice and consulting with clients
- Amount of post/closing support offered by new owner
- Evaluate stability of the revenue
- Factors to consider:
- Revenue sources
- Transactional
- Trails
- Management Fees
- Growth potential of fee income
- Growth potential of client base
- Demographics of clients ( are there too many clients over 70)
- Concentration risk (revenue is limited to a few clients)
- Revenue sources
- Practices with cash flows over $1M annual GDC tend to have higher multiple valuations
- Practices at $200k annual GDC and below tend to have lower multiple valuations
- Common Multiples:
- Non-recurring revenue: 0.3x the trailing 12 months to 1.0x
- Recurring revenue: 1.16x the training 12 months to 2.3x
Other Potential Impacts on Valuations
- Few if any systems or processes are uniform (negative impact)
- Overall client’s average age over 65-70 (negative impact)
- Clients are widely dispersed across many regions (negative impact)
- Extensive variation in product usage (negative impact)
- Minimal client interaction (negative impact)
- Frequent client complaints (negative impact)
- Practice is in decline/distress (negative impact)
- Practice is run as a business-not as sole practitioner (positive impact)
- High use of fee based/recurring solutions (positive impact)
- Declining practice profitability (negative impact)
- Significant amount of unprofitable client relationships (negative impact)
- Untapped potential for insurance sales (positive impact)
- Assets in depletion and/or payout phase (negative impact)
Deal Structure Highlights
- Deal structures vary and may consist of one or more of the following:
- Down payment
- Promissory note
- Earn out
- 3-5 year & 6-8 year earn out periods are common
- seller typically earn more total compensation
- seller helps transition the book
- seller guarantees a minimum level of performance
- retention targets based on the expected number of assets
- revenue or clients that will be retained through the deal