Ten Value Drivers to Grow the Valuation of Your Financial Advisory Business.

There are myriad quantitative and qualitative factors that can increase or decrease the monetized value of a financial advisory business. To maximize your business's valuation, careful consideration should be given to each of them when designing a business model.

Using an algorithm to determine the Fair Market Value of what a wealth management business is worth in a generalized scenario, may be an appropriate method to provide a starting point for negotiations. However, determining the Strategic Value of what your unique business is worth to a specific buyer, often has nuances that mere formulas are not built for. For this reason, each transaction needs to be considered on an individual basis with all the value drivers (and detractors) properly accounted for.

Over the years our consultants have identified more than fifty such value drivers. In this edition, we will discuss ten of the most common that we believe are worth noting:

1. Compatibility & Alignment:
If a buyer and seller are similar in not only their service offering but are also like-minded in the values, behaviors, and culture that they hold, there can be synergies that create monetizable value. The structure and economics of such a partnership are often quite clear and in writing. Because of this, it is often the unwritten behavioral and cultural expectations that cause a transaction to fail. Being aligned and compatible with whomever you choose to take over your business will not only improve your quality of life, but it will help mitigate risk and allow for a smoother transition.

2. Interdependence:
When an advisor’s clients are not solely dependent on them, but also the deliverables, systems, and staff of the parent firm, they will be far easier to retain and transition to a new advisor. The extent to which your clients are loyal and dependent on you, must be transferred in its fullest extent to the individuals who will be serving them once you have exited your practice. This sort of interdependence will increase client retention and thus create value for both parties.

3. Congruency:
To ensure that your clients remain with your firm after you retire, it is important for them to have a similar experience with your successors as they did with you. Meaning, the same quality, cadence, deliverables, and service that you provided them over the years, must be congruent with what they will be provided moving forward. The congruency and continuity of their experience will play an invaluable role in their level of comfort and loyalty to your partners. The greater the congruency of service and client offerings, the greater the value of the partnership and / or purchase.

4. Strength of the Client Base:
The size, type, age, behaviors, occupations, and needs of your client base, all contribute to its stability. Who your clients are, plays a significant role in the ability of a buyer to retain and cashflow the acquisition of your business. In many cases, a diverse clientele can be more stable. In other cases, a homogenous client base can be easier to serve and find a successor for that would have a natural affinity for serving such households. Because of this, whenever possible, careful consideration should be given to the type of clientele one pursues and retains.

5. Geography:
Although we live in a world filled with virtual communication, location still matters. For many clients, the ability to meet face-to-face with the advisor that will be serving them, can be pertinent to their level of comfort and trust. Although people are growing ever more comfortable with virtual communication and electronic transactions, being able to develop a relationship with someone in-person, will always be a strategic advantage that creates value.

6. Intellectual Property:
If you have developed systems, processes, technology, or deliverables that provide you with a strategic edge, these can be a significant value driver. So long as their use is transferable to the acquirer and the strategic edge they provide will persist into the foreseeable future, they can be a noteworthy value-add to a buyer.

7. Operating Margin:
Running lean as a business not only provides you with additional profits but also demonstrates to a buyer that your business can run efficiently. In contrast, an advisory business that has large amounts of overhead can still be quite valuable to a buyer that has a highly efficient platform. So long as the revenue is transferable to the acquiring firm’s platform, it could be much more profitable in the new ecosystem. Naturally, this would create a monetizable value for both parties.

8. Revenue:
The amount of revenue taken in is one of the most obvious drivers of value in any business’s monetary worth. As illuded to in the previous point, an increase in revenue will drive profitability but can be even more profitable if transferred to a platform with a higher operating margin.

9. Efficacy & Reliability of the Revenue Model:
It is not only the amount of revenue that matters, but the type and source thereof. Recurring revenue will always be better than nonrecurring, and the source of the revenue is almost always more valuable to a buyer if it aligns with their primary source of revenue. Because of this, it can be pertinent to find an advisory partner who has a similar business model and service offering as you.

10. Growth:
If you have created reliable, repeatable, and proven methods of growth that are transferrable to those who are filling your shoes, for obvious reasons, this can be a significant value-add to an acquirer. Often this type of value driver comes in the form of a specific and targeted methodology of lead generation.

Due to the wide variety of significant factors that determine the strategic value of one’s wealth management business, it is important to develop an intentional and strategic plan to design your business in such a way that maximizes its value to a specific type of buyer. Although a generalized value proposition has its merits, a focused business model often provides the best returns during the years spent building it and the greatest value at the point it is handed over to a trusted partner.

If you would like to speak with one of our consultants about maximizing the value of your business or finding the right professional partners to come alongside you on your journey, please email us at info@AdvisoryDNA.com or contact us through our website.