Financial Advisor Firm Valuation: A Guide

If you’re interested in buying an established advisory practice, or selling one that you currently own, you first need to have a good idea of what it’s worth. After all, value is central to the discussions when a business is set to change hands. Here’s what you need to know about financial advisor firm valuation and why it matters.

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Financial Advisor Firm Valuation Models

There’s more than one way to determine an advisory firm’s value. Some of the most popular valuation models use some form of multiple. The following are a few of the ways to estimate what an advisory business is worth.

Revenue/Profit Multiple

Using a revenue multiplier is a quick and dirty way to value an advisory business. With this model, you’d multiply the firm’s revenue for a set period of time by a specific number to get a rough estimate.

For instance, say you’re interested in buying a practice that generated $10 million in revenue over the previous 12 months. A typical multiplier is 1 to 3. So, using this method, you could estimate a value range of between $10 and $30 million for the firm.

You can also substitute profits for revenue to determine value. Here, you’d use a multiplier of 1 to 3 times the firm’s earnings, before interest and taxes.

EBITDA Multiple

EBITDA represents an advisory firm’s earnings before interest, taxes, depreciation and amortization. To apply this model, you’d multiply the firm’s EBITDA by your chosen multiplier.

EBITDA multiples are industry-specific and tend to be higher for financial services businesses. Market trends, company-specific factors and what’s happening with the broader economy can influence the multiplier you use at any given time.

Discounted Cash Flow

The discounted cash flow method draws on several factors to determine a firm’s valuation, including its performance and business model. With this method, you’re attempting to forecast how the firm will perform in the future, using discounted cash flows.

Discounted cash flow (DCF) is more complex than the revenue or EBITDA multiple models. You may consider working with a business consultant to calculate DCF for an advisory firm you plan to buy (or sell).

Comparable Company Analysis

Comparable company analysis establishes the valuation of an advisory firm, relative to a grouping of competitor firms. It’s similar to a realtor using comps to help a homebuyer determine if a seller’s asking price makes sense.

To use this financial advisor firm valuation model, you’d first need to determine which companies you want to analyze. You’d then use either the revenue or EBITDA model, or both, to establish a rough valuation estimate.

Precedent Transaction Analysis

Precedent transaction analysis determines valuation based on similar companies that have been sold in the past. You’re not looking at cash flow or revenues with this valuation strategy. Instead, the focus is solely on what companies similar to the one you want to buy (or sell) have sold for historically.

Factors Influencing Financial Advisor Firm Valuation

An advisor calculates the valuation for his firm.

What determines what one firm is worth compared to another? At the end of the day, a firm is worth what a buyer is willing to pay for it. That being said, the following factors can shape valuations.

Client demographics
Client engagement and retention
Niche/specialty
Revenue trends
Cash flow
Growth projections
Assets, including intellectual property
Liabilities
Business model and range of services offered
Brand recognition and visibility
Organizational structure and efficiency
Business development
Technology use
Compliance adherence

Timing can also make a difference. Valuations for advisory firms may soar when financial advice is in demand and investor confidence is high. Increased market volatility, on the other hand, could decrease values if investors have a negative perception of the financial services industry as a whole.

Maximizing Valuation as an Advisor

You may have no plans to sell your firm now, but if that changes, value may become a top concern. Maximizing valuation begins with understanding what may be holding your firm back and addressing those challenges to increase your business’s worth.

Here’s another way to think of it: What would make your firm most attractive to a buyer?

The answer may include:

Up-to-date technology
Streamlined front-office and back-office operations
Established sales funnels that regularly drive conversions
Recognizable branding
An in-demand niche
Strategic partnerships and centers of influence

In a perfect world, you’d have no problem areas, but that’s not realistic. If you’ve identified some trouble spots, assign each of them a priority ranking and then work your way down the list from most to least important.

For example, if your brand presence is lacking, you may consider revising your branding statement or reviewing your marketing plan. If you lack strategic partnerships, you might consider how you can supercharge your business development efforts to build those connections.

Adding value might take time, but it can be well worth the effort. The key is knowing what to focus on and having a structured plan for improvement.

Frequently Asked Questions (FAQs)

How Are Financial Advisory Firms Valued?

There’s no single valuation method you can apply to determine what an advisory firm is worth. Some models use revenues or profits, others look at EBITDA or comparable firms to determine value. Rather than sticking to just one valuation method, it could make sense to use several so you have a range of numbers to consider.

How Much Is My Financial Advisor Business Worth?

The short answer is that a financial advisor’s business is worth what a buyer will pay for it. If you’d like to get an actual number, you could apply the revenue multiple, profit multiple or EBITDA multiple model to get a ballpark figure. You could then take a deeper dive and apply the discounted cash flow method to establish a valuation.

What Are the Pros and Cons of Buying an Advisory Firm?

Buying an established firm or its book of business can help you scale and grow if you’re acquiring high-value clients that you’re likely to retain. The biggest risk is making a bad investment in a company that doesn’t align with your firm’s business or service model. It’s also important to get multiple valuation estimates to ensure that the firm you’re buying is worth what you’ll pay.

Bottom Line

An advisor reviews the valuation for his firm.

Valuing an advisory business can be challenging, as the details of the firm can have a significant impact on which way the numbers move. If you’re considering the acquisition of a business or think you may want to sell your firm, you may find it helpful to have a valuation consultant guiding you through the process.

Tips for Growing Your Advisory Business

Your brand reputation matters for determining value; the most successful advisors have highly visible brands. If you’re looking for a way to get your business a boost, it could make sense to partner with an online marketing platform. SmartAsset AMP (Advisor Marketing Platform) is a holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you develop your practice’s marketing operation. Get started today.
How often should you estimate your firm’s value? A good rule of thumb is to run valuation calculations every one to three years. Doing so can allow you to see how your business is progressing and adjust if needed to increase your firm’s value.