For RIAs contemplating a sale of their business and looking for a way to obtain a quick valuation, there's now a free online service for that.
The valuation consultant FP Transitions this week introduced what it's calling its Estimated Value Index to help give advisors a better idea of what their firms could fetch on the market. The new index can serve as a starting point for gauging firm value. And even if RIA owners aren't thrilled with the answers they get, there are many ways to increase attractiveness for buyers, from simplifying business models, changing advisor pay, reconsidering fees, and more.
RIA owners who sign up for the on FP Transitions' website for the Estimated Value Index will first answer questions about their annual revenue, assets under management, ownership structure and similar matters and then receive a ranking on a scale of 1 to 100. The closer to 100 a firm comes, the stronger its chance of fetching a high price in a sale.
FP Transitions CEO Brad Bueermann said it would be oversimplistic to maintain that a high score guarantees that a firm could get, say, 18 times its EBITDA as an acquisition price. EBITDA — or earnings before taxes, interest, depreciation and amortization — is the most commonly used starting point for setting RIA valuations.
Rather than point to a specific EBITDA multiple, according to Bueermann, the Estimated Value Index is more of a "relative indicator"
"But, on a scale of one to 100, if you're a 98, you're a lot closer to that 18 times [EBITDA] than you would be if you were a 72," Bueermann said.
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Maybe you can't get 20X EBITDA, but you can get closer
As merger and acquisition deals continue on a tear in wealth management, one of the biggest questions confronting RIA owners contemplating a sale remains: How much can they
Valuation experts are usually quick to pour cold water on advisors' hopes of securing something similar. It's a rare deal, they caution, that results in so high a multiple.
Bueermann said there was a time when firms' sales prices marched more or less in lock step with their AUM totals. Nowadays, buyers are much more intent on gauging possible acquisition targets' potential for turning profits.
"We've seen firms that have $200 million in AUM sell for $10 million," Bueermann said. "And we've seen firms that have $800 million in AUM sell for not a whole lot more than that."
Bueermann said the Estimated Value Index doesn't stop at giving firms greater understanding of their current assets and attributes. It can also diagnose what ails them, helping owners know what steps they can take to increase their firm's likely valuation.
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Key factors in RIA valuation
In attempts to gauge purchase prices, Bueermann said, not enough attention is paid to employee compensation, which he called "the primary expense for any advisory firm." Drawing on data compiled from more 19,000 valuations performed in its 25-year history, FP Transitions can tell firms if their pay is more or less commensurate with others in the industry.
More than that, it can ascertain if the ways firms provide compensation — for instance, if some advisors still collect commissions on sales of certain products rather than strictly offering their services for fees — are conducive to business growth. For firms that go beyond the free Estimated Value Index and subscribe to a paid tier for the service, FP Transitions will provide data tailored to individual employees in particular geographic locations.
"Is my bonus program commensurate with my peers'? Is the amount of equity that I have offered also commensurate? How much is equity pay versus how much is straight compensation?" Bueermann said. "Those are the kinds of questions that we want to delve into."
Another trait buyers tend to highly value is firms' so-called organic growth — meaning assets brought in through new and existing clients. Recent years of strong market gains have made such organic growth difficult to
Bueermann said FP Transitions can gauge organic growth in part by looking at whether a firm's array of service offerings is likely to appeal to a broad range of potential clients. Numbers like the average clientele age can meanwhile shed light on whether existing clients are not only likely to be sources of continuing business but also referrals for new investors.
"A rising market can disguise a lot of weaknesses in a firm that makes it look like they're progressing nicely," Bueermann said. "But, in fact, these are weaknesses within that that we're beginning to pick up in the valuation sense."
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The value of simplicity in making a firm sellable
For at least one RIA buyer, the fact that valuation consultants are at least out getting firm owners to think about these questions is a step in the right direction. Eric Amar, the founder and CEO of Accelerated Wealth Partners in New York, said many of the firm owners he talks to about a possible purchase are simply too busy working with clients to have thought about what matters most to buyers.
To the extent that something like the Estimated Value Index or any similar system enables them to be better prepared, it's all to the good, Amar said.
"I think these tools are always helpful to give people a sense of where they fit and what metrics matter," he said. "When they have conversations with me, we speak more of the same language."
Amar said RIA owners often talk amongst themselves and have their heads turned by tales of extraordinarily high valuations. Rather than be distracted by rumors of high EBITDA multiples, he recommended that owners who want to sell concentrate on building firms that are sellable.
For him, that means simplicity in the business plan. Firms whose advisors rely heavily on commissions can be unappealing because the sales transactions underlying that revenue can occur with much greater or lesser frequency from year to year.
Another detractor from firms' appeal is an advisory workforce made up mostly of independent contractors rather than direct employees. Independent advisors "are kind of worthless to me as an investor because they can work at one time."
Amar said the two RIAs that Accelerate Wealth Partners has taken minority ownership stakes in the past year or so have very simple business plans. He said RIA owners are, of course, free to build their firms in any way they want.
But if selling is their ultimate goal, they should be aware that complexity will most likely diminish their bargaining power.
For him, he said, the perfect firm owner is one who can say "I have high net worth clients. I charge 1% on those. I do a great job. They never leave. I pick up more of them every year. I've hired a team and pay them fair compensation.
"Every time you make it more complicated than that," Amar added, "it becomes a little bit less valuable."
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Deals may be plateauing, but firms can still get top dollar
Amar acknowledged there's little doubt that there are buyers who are willing to pay more for firms with certain attributes — say a cutting-edge tax-planning service or a particular strength in working with high net worth clients. That's why a service like the Estimated Value Index is a good way to start thinking about valuations, although not necessarily obtaining a definitive answer.
"If someone tells you your firm is worth 18 times EBITDA, I say, 'Great, tell them to write you that check in cash up front.'" Amar said. "You won't be 18 times anymore."
Bueermann said transactions also go the other way. Sellers can be dazzled by what seems like a really high multiple in the first or second offer they receive and agree to deal without realizing they could have fetched even more from another buyer.
After seeing average RIA sales prices climb steadily for years, Bueermann now finds himself in the camp of those who think they've
"My guess is that as the business progresses and we create this sort of stasis in the multiples, it will become even more important that firms begin to look at what their underlying strength is," Bueermann said. "That brings us back to why this index and why looking at comparative benchmarks, around compensation and other areas, is so critical."
