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How to Accurately Evaluate your RIA

Posted on March 13, 2019

A retired long-haul trucker and bargain hunter found a strange painting at a thrift store in 1992. She purchased the artwork for a friend for $5. Through a bizarre confluence of events and accidental conversations, she found out the painting is most likely an original Jackson Pollock — potentially worth several million dollars.

Determining the value of your business is a quick, shorthand way of knowing if you have a potential Pollock or something else entirely. The valuation of your firm should give you some idea of its overall health through lenses like client stability, business stability and market stability. Still, gauging the true value of your firm can be quite humbling. The decades spent building the business — the blood, sweat and tears invested in its growth — can often lead advisors to inflate their value by inserting the emotion that comes with putting a number to your life’s work.

To prevent any fuzzy math and calculate a valuation that will stand on its own in the heat of negotiation, examine a few key metrics that won’t mislead your perception of business value and can help you benchmark alongside other firms of similar size and complexity. In coaching thousands of advisors, we’ve come to see three personality types when it comes to how each sees their business.

First, the cash-flow focused advisor runs his or her business to create a lifestyle for themselves. The business is there to serve the purpose of supplying cash flow and a standard of living for the advisor. This book of business is typically closely tied to the advisor’s own identity, so when the advisor goes, so do the clients.

Wealth management M&A

The second advisor type is the value achiever. This is where the majority of advisors sit. Someone who is working to build a solid business model and may even be taking steps to solidify their succession so the business can survive beyond them. This business owner serves their clients well and generates good business off a solid referral network and other avenues. However, they may not have an accurate depiction of what their business is worth because so much of the firm relies on a few select individuals to keep it running.

The third and final advisor type we see is the value maximizer. These are the advisors who are forward-thinking and are building their business on a foundation of core processes, scalable systems, talented individuals and a proven, differentiated value proposition. These are the “go to” advisors in the local area. The ones who are looking to acquire versus be acquired. The ones who see the business far beyond their individual vision and contribution.

Any one of these three advisor types could look the same on the outside in terms of assets under management, growth rates, number of clients and other metrics, but on the inside, their businesses have vastly wide-ranging valuations. So, what factors can you focus on to build a more sustainable business that demands a higher valuation?

Our conversations with advisors have unveiled a surprising reality: less than a third (around 30% of advisors) actually know or can recite their net new assets each year. Yes, most of them (90% in our experience) know their new asset number, but far less know their net new asset number.

NNA is one of the biggest indicators of business viability and health. It exposes a firm’s often sugar-coated AUM or revenue growth, highlights the impact of client distributions, and speaks volumes (to those looking to acquire) to how much the advisor is focusing on the long-term success of the firm. In many ways, it’s the lifeblood of the business.

The second crucial factor to maximizing your firm’s valuation is its infrastructure and ability to scale. As your client base and assets increase, your firm must do so along with it. Review your menu of services, the expertise of your team and your own core processes. The more you’re able to show that your business can evolve and grow with the marketplace, the less risk any buyer will see in acquiring your business.

Do your repeatable processes and systems allow the firm to run without you? The more you can make yourself replaceable, the more you’ll see your valuation increase because of the independent nature of the firm’s viability.

Solidifying your structure can also lead to your succession plan. Yes, we all know our ability to future-proof our business will give us some measure of peace in the present and strengthens the company’s culture —but the majority of advisors have yet to act. According to FPA’s recent study with Janus Henderson, 73% of advisors do not have a written succession plan. The even scarier reality: 60% of those advisors are staring at retirement within the next five years. That’s a shocking number, considering most advisors will ask for a multiple on their business they aren’t able to prove.

Ask yourself some tough questions:

  1. Have I positioned the firm to maximize the current cash value for myself or to achieve the maximum value in a sale?
  2. What does it cost to replace me as the CEO?
  3. If I died tomorrow, would I entrust my own family’s financial well-being to my firm?
  4. Is my perception of my firm’s value accurate, or do I have some house cleaning to do to maximize its value?

Be honest with the health of your firm. Grade yourself against the marketplace, initiate conversations with firms who can provide an accurate assessment of valuation and systematize your service model.

It’s reported the long-haul trucker still has her potential Pollock — waiting for the right buyer to come along with the right price. Fortunately, you know you have a work of art. Stop procrastinating on what may be the most important step you take in the lifespan of your business. Know what you’re worth and why. Understand the levers you can pull to maximize your value. It’ll be the first step to improving your practice and securing a legacy for your family, your team and your clients. And nothing may be more important than that.

Financial Planning

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