TRANSITION TALK

Many financial services businesses focus on revenue strength while downplaying–or ignoring–enterprise strength. However, revenue strength and enterprise strength are both critical to the growth and sustainability of a business. When revenue is the sole driver of your value, you’re leaving money on the table and jeopardizing the long-term success of the business.

Since revenue and enterprise strength influence the value of your business in different ways, it's crucial to understand these differences and why balancing the two is so important. While clients, fees, and assets under management (AUM) pay the bills, the absence of a solid business infrastructure will put a company's longevity at risk. Whether you’re determined to create explosive business growth or have a sale–external or internal–on the horizon, knowing how to position your company now can result in a higher return on your efforts and investment for the years to come.

Revenue vs. Enterprise Strength

Revenue strength represents the source, quantity, and quality of your cash flow. This includes your active income generated based on advisory fees, commissions, and other financial planning services. Revenue strength accounts for your team’s compensation and other business expenses. Revenue strength represents the top-line accounting of the business.

It's the value of your book.

Recurring revenue is one of the most important single determinants of value. Revenue produced through management fees, trails, or renewals is ongoing and reasonably predictable. Transactional revenue is more elusive and difficult to predict. While this isn’t cutting edge news, it is important to understand that recurring revenue is more predictable and presents less risk of future earnings when compared to transactional revenue. As such, when a portion of revenue is generated from transactional revenue, buyers will require a higher rate of return (discount) when compared to other market alternatives that provide more certainty.

Rule of Thumb?

It is important to understand the difference between an adjusted pricing multiple based on the specific characteristics of the business being valued versus a “rule of thumb.” A rule of thumb for the financial services industry is that businesses sell for two-times gross recurring revenue and one-times non-recurring revenue, or that they are worth five-times Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Often sellers approach us asking if the offer they have received based on a rule of thumb is sufficient or fair. This question cannot reasonably be answered without understanding the revenue characteristics of the practice.