Is the Valuation in Your Head the Same That Will End Up in Your Pocket?

Over the years I’ve had countless discussions with smaller financial advisory firm owners regarding everything including growth, technology, creating efficiencies, and differentiating their businesses. Ultimately, each firm tends to have a vision of where they want to go, how they foresee the future of their business, and its perceived value.

What I have found, however, is that while advisors do an excellent job of navigating the complex world of planning and wealth management, they are not necessarily as diligent and objective when it comes to their own businesses. It is too personal.  Whether we are talking about a percent of trailing revenue or a multiple of EBITDA, there are various pitfalls such as emotional attachment, pride, and optimism that can create a rosier picture than reality.

Perception Vs Reality

The reality is that when an external buyer looks at a smaller advisory firm, they may not be looking at it the way the seller does, discounts may be taken before the multiples or percent of revenue is applied.  The buyer’s due diligence is going to look at the risks they are accepting when buying a business.  Things that the seller may, in their rose-colored glasses, think are assets may in fact be a negative to someone else. Think about your business for example:

• Where you may see a great relationship with some of your wealthier families, they may see the concentration risk of a large portion of your revenue tied to a small number of clients.
• Where you may see a great staff and firm ability, they see dependence on key personnel and the risk of staff retention.
• Where you may use systems that have been honed for years, they may see the need to invest significant dollars to build better operational efficiency and infrastructure.
• Where you may see long-term client relationships, they may see an aging client list in or near drawdown.
• While you may see steady growth via a few referrals a year, they may see it as a more stagnant business without an organic, diversified, and proactive plan.

Each one of these examples (and there are many more) would lead to a discount on the purchase price of a firm leaving the owner with less than he/she thought the business is worth.  Larger firms with resources can command the higher multiples as many of the process have been institutionalized and would be discounts addressed.

Realizing that many advisors have spent years building a business, it can be disappointing to find out that the number in their heads may not match the amount in their pockets after the sale.  It only makes sense to take a more objective and realistic approach to addressing those underlying risks now if they are thinking of partnering, merging, or selling in the future.