Is Your Advisory Firm Near Peak Value? How to Know When to Sell

By Scott Leak 

We were recently asked by a 73-year-old advisor when the right time is to consider selling his business. When we talk about the valuation of an independent wealth management firm, how different is it from the valuation of a publicly traded company on Wall Street?

At its core, not much.

We've all heard the phrase, "Past performance is not indicative of future results." It's a statement you've likely even said to your own clients many times. Yet the reason it exists is because while past performance does matter, it’s simply not the only thing that matters.

Let's take two well-known stocks as examples: NVIDIA and Lululemon.

If you look at five-year charts of revenue and stock prices for NVIDIA and Lululemon, you will see two companies with very different trajectories. NVIDIA's revenues and earnings exploded, and investors rewarded that growth with extraordinary stock performance. While Lululemon has continued growing revenues and earnings, investors became less optimistic about the company's future growth prospects and reduced the valuation multiple they were willing to pay. As a result, the stock fell 60% from 2021-2026 despite 150% revenue growth! The market no longer values Lululemon at 50-60x earnings; it values it at less than 10x earnings.

The lesson is simple: investors don't pay for what a company has done. They pay for what they believe the company will do.

Before we turn this analogy back toward RIAs, let's consider who sits on the buy side of advisory firm transactions. It may be a private equity-backed aggregator, a large national RIA, or even a sub-billion-dollar firm pursuing its first acquisition. Regardless of who the buyer is, the savvy ones are thinking much like Wall Street analysts.

While sellers remain relatively scarce compared to interested buyers, investors are not going to pay the same multiple for every advisory business. Just as Wall Street places a premium on companies like NVIDIA with stronger growth prospects, buyers of RIAs place premiums on firms they believe will generate stronger future returns.

So who receives a 5x EBITDA multiple, and who receives a 10x or even 15x multiple?

The answer is surprisingly similar to how publicly traded stocks work.

Savvy investors want to acquire advisory businesses that have strong prospects for future growth and cash flow. Since none of them possess a crystal ball, they evaluate the same things investors have always evaluated: recent past performance, current assets, and the likelihood of those factors continuing to produce attractive results in the future.

The first thing they examine is revenue quality.

If most revenue is recurring, investors gain confidence that the revenue stream will continue with relatively little friction. Revenue tied to recurring advisory relationships is inherently more predictable than revenue that must constantly be replenished through new sales efforts.

Next, investors may examine the clients from which that revenue is derived.

Are the majority of 50-year-old business owners, executives, and accumulators likely to continue growing their wealth for another decade or two? Or are they primarily retirees drawing down assets and taking required minimum distributions each year? If you were to acquire another advisory practice, all other things being equal, which of these two books of business would you rather own?

Then, investors may assess the business’s assets themselves.

Unlike NVIDIA or Lululemon, advisory firms don't own factories, manufacturing equipment, or patents. In our industry, the “assets” are the people responsible for serving clients and generating growth. Just as investors evaluate how long physical assets can continue producing, they evaluate how long the human assets of an advisory firm are likely to continue creating value.

Are the key advisors and leaders likely to remain productive contributors for many years? Is there a next generation already in place? Does the organization have the talent, capacity, and desire to continue growing? There is a scarcity of experienced advisory talent in our industry, making these assets neither easy nor cheap to replace.

As a result, savvy investors of advisory practices generally place a premium on firms that are already equipped with the people and infrastructure necessary to sustain future growth. The move-in-ready business receives a premium valuation. The fixer-upper receives a discount.

Now that we understand how acquirers value advisory businesses, owners can begin thinking about their own firms through the same lens.

Which brings us back to our original question: When should an owner think about selling?

Ideally, it is when these KPIs are converging near their peaks:

• When is revenue growing at its strongest rate?

• When are clients nearing peak earning and accumulation years?

• When are the “assets” at peak productivity, with fuel still left in the tank?

In other words, when do these metrics indicate that a strong future performance is most predictable?

For many advisors, the answer arrives much earlier than expected.

Derived from more than 18,000 valuations, FP Transitions’ data shows that the median growth rate of advisory firms peaks while owners are in their 50s, declines meaningfully in their 60s, and often struggles to even keep pace with market returns by their 70s. That doesn't mean every advisor follows that exact pattern; some firms continue growing well beyond industry averages. But the data does suggest something important: business value does not necessarily increase forever.

If our 73-year-old advisor can clearly see a path to improving the factors that drive valuation—growth, talent, client demographics, and future capacity—then perhaps waiting still makes sense. However, owners often discover that the peak valuation of their business occurred years earlier. For those who have not yet reached that point, the more important question may be: Do I know when my peak valuation is likely to occur?

The best time to understand the value of your business isn't when you're ready to walk away. It's years before you're ready to sell, while you still have time to influence the factors that drive value. Whether you're evaluating NVIDIA, Lululemon, or your own advisory firm, it all boils down to the same question:

Do future returns look like that of a rising star or fading one?

This may sound somewhat discouraging for owners who have already passed their peak metrics, because for them, the answer to our question is that every passing day is now the day to consider selling.

However, there are two significant bright spots.

First, the owner's experience, relationships, and expertise remain valuable assets to a savvy investor long after a transaction occurs. In most cases, the merging of assets continues creating value for years following a transaction. Generous compensation is possible in addition to the transaction value. Second, the transaction proceeds can be diversified and reinvested into other assets with stronger future growth prospects, which could very well include the business of your new partner! Who knows? They may just offer the returns of the next NVIDIA.