The value of your practice is determined by many factors, some obvious, and some not so obvious. Even if the idea of exiting the business is far down the road, as an owner you need to consider the ten factors below as part of managing and growing the practice. Focusing on these areas can make a major difference in your book’s sustainability and its eventual purchase price (when transition time arrives).
The purpose of this article is not to review the theoretical aspects valuation or create an exhaustive list of factors that influence your value. That would be a much longer, technical article–which can be viewed here. The point here is to highlight the drivers that can help give your value an extra boost in the right direction. These factors include:
- Predictable revenue and recurring revenue streams
- Client demographics
- Average client tenure
- Size of potential market
- Transition timing
- Client affluence and average client revenue
- Asset or revenue concentration
- Use and structure of referral fees
- Length of surrender period
- Profitability
As you look at your practice with an outsider’s eye, you will see avenues that help grow the business and make it more robust.
Read More
Topics:
Business Growth,
Business Value,
Buying & Selling,
Sustainability,
Benchmarking,
Valuation & Appraisal
In our second book, Buying, Selling, and Valuing Financial Practices (the M&A Guide), we introduced the term of a “predatory buyer” to our readers. If you are thinking about selling your practice one day, you need to understand how certain buyers will approach you, how to protect yourself, and what, or who, to watch out for. In this article, we will answer these important questions for potential sellers:
- What exactly is a predatory buyer?
- Where do I look to find a qualified and capable buyer, AND realize the full value of what I’ve built?
- What is the difference between selling value and realized value?
Predatory buyers don’t actually announce themselves. Still, there are telltale signs and, unfortunately, it’s often the outcome of negotiations that signals it was a “predatory” deal. In this case, the term applies to a group of well-funded and capable acquirers who buy everything and anything within a single independent broker-dealer (IBD) or custodian but do so with complete disregard for market value or professional deal terms. Such buyers typically acquire smaller books at the rate of one or two per year. These buyers are skilled at getting what they want. Indicators include proposing pure split revenue buyout offers, using rules of thumb based on multiples of revenue or earnings, discouraging a valuation of the practice (“it’s really just not necessary”), and creating deal terms that create a “heads I win, tails you lose” sale.
Read More
Topics:
Selling Your Practice,
Business Value,
Open Marketplace
Compliance is a “have to” in the financial services industry. Advisory firms are required to have a compliance officer or a designated third-party compliance administrator. While your business might technically meet internal compliance requirements, there’s much more to consider in order to keep your business protected from regulatory scrutiny.
We recently teamed up with
Bates Group to film a series of special Roundtable Talks centered on the importance of staying on top of compliance. One of Bates Group’s Managing Directors, David Birnbaum, JD,
joined us to talk about the ways to achieve good compliance management, as well as how it can impact the value and growth of your firm. From these conversations we’ve found the following five compliance mistakes to be the most common to many financial services businesses.
1. Neglecting Internal Compliance Audits
If you wait until you’re faced with a regulatory audit to look at your policies and operating procedures, you’ve waited too long. By reviewing the business periodically, you’ll not only be able to head off potential issues before they arise, but you’ll be prepared for any observations a regulator could make during a compliance audit. In addition to the security in knowing everything is running smoothly and within regulation, you’ll also be able to confidently answer any questions a regulator or outside party might have about your business.
Read More
Topics:
Acquisition,
Business Value,
Roundtable Talks,
Compliance
Everyone seems to want the easy (and free) way to determine value, but is a multiple of value really a good choice? Here's a hint: no, no it's not.
The infographic below uses real data from the FP Transitions 2015/16 Valuation Database to illustrate why applying a multiple to your revenue is a terrible way to determine the value of your practice, and why you're likely to end up losing more money than you avoided paying up front.
Read More
Topics:
Business Value,
Multiples
I rarely meet a financial advisor who doesn’t immediately mention that they want to buy a practice. It seems to be every advisor’s goal. Of course it is. And in my eight years in the industry, I have seen why.
One of the fastest ways for a firm to grow is to acquire another book of business. However, the process is more nuanced and competitive than most advisors seem to think. Most assume they will figure it out as they go along. If you take the unguided DIY approach, however, mistakes will be made–perhaps big ones–and you’re likely to leave money on the table.
Like every aspect of business ownership, acquiring a book of business takes advanced consideration and preparation. These are a few steps you should be taking now, prior to developing and executing your acquisition strategy.
1. Develop Your Buyer Profile
Membership to fptransitions.com is free. We don’t believe there should be a series of hoops to jump through before you can explore the largest open market of M&A opportunities; or even to access our library of business building, acquisition, and succession resources.
Step one to taking advantage of your fptransitions.com membership is to complete your buyer profile. This series of basic questions gives the team at FP Transitions an overview of your company and team so we can best help you find acquisition opportunities that would be a good fit.
Pro tip: FP Transitions uses the information provided in your profile to search our database of 25,000+ advisors to find the right buyers for private sales, continuity partner matching, and successor searches.
The buyer profile is your opportunity to offer information that makes you stand out from your peers. The Practice Description field especially. If you offer a few concise thoughts on what makes your practice unique, you’re already setting yourself apart.
Read More
Topics:
Acquisition,
Business Growth,
Business Value,
Continuity Partner Matching
1. Invest in Human Capital
Most advisors have built their business from nothing into their single most valuable asset. Data from our 2015 Valuation Database indicates that businesses with multiple professionals accumulate assets at a higher rate than sole practitioners. As your business matures, it is imperative to invest in the next generation of talent, to keep the engine running while you begin to enjoy the reward for what you’ve built.
Read More
Topics:
Revenue Strength,
Enterprise Strength,
Business Value
Success in any endeavor comes from a combination of luck, timing, and strategy. If your goal is to grow your practice, acquire another firm, or build a legacy with your financial advisory business, developing the right strategy is crucial to your success. In Sun Tzu’s The Art of War – often cited as the canon of business and military tactics – understanding your unique strengths and weaknesses compared to your competitors’ is the foundation of a successful strategy.
Read More
Topics:
Business Value,
Benchmarking,
Valuation & Appraisal
There is much to consider when determining and receiving the true value of your financial services practice, things like assets under management, client demographics, revenue mix, likely employee and client retention, and, of course, cash flow. Check out Wealth Management's recent article, "Boosting Curb Appeal" by Anne Field, for advisor experiences when it comes to looking at all the factors of practice value, including 25-year industry veteran Elizabeth Brickman who valued and sold her business with the help of FP Transitions, but not before realizing the importance of preparation and targeted growth prior to selling.
Understanding all the little things that boost the value of your business will not only benefit you should you decide to sell, but will help you identify areas on which to concentrate on to promote growth.
Read the full article here.
Read More
Topics:
Selling Your Practice,
Acquisition,
Business Value,
FPT in the News
Read: