If you've ever sold a house, you can probably remember that first walk-through with your real estate agent.

From backyard to front curb, your home gets scrutinized and evaluated for its resale value. Usually it’s found to fall short of perfection. Cognitive dissonance sets in — how could anyone dislike a few Green Bay Packers logos on the walls?

As eye-opening as it can be to undergo an impartial appraisal, it's smart to know how the marketplace perceives value. Understand valuation, and you can figure out what needs improvement. A pro's opinion on how to boost the resale price of your home comes in handy, for example, when deciding what to renovate. Maybe those garage doors really do need to be replaced.

Market valuation can provide especially useful insights to business owners who anticipate selling their firm in the near future. Although buyers may differ on the factors they care most about, valuation can often explain why one firm gets a high offer and another is sold for a so-so price.


Previously I highlighted the three fundamental factors —size, revenue and organization—that play the largest role in determining practice valuation. Variable factors, however, can increase or diminish the impact of those fundamentals. These drivers are costs, capabilities, leadership, client demographics and client experience.

The first two, costs and capabilities, are easy to capture: You list your capabilities in a corporate brochure and enter your costs on a spreadsheet. Both can be measured and compared to industry benchmarks, but their impact on market value can often be less clear.

Combined with revenue, costsfixed and variable expenses – will determine a firm’s profitability and cash flow. When they reflect investments in technology or other productive resources, costs can have a favorable impact on valuation. Many buyers, however, expect to implement their own cost structure post-acquisition, which may reduce the importance of expenses in valuation.

Capabilities vary greatly among firms, and can therefore impact valuation in different ways. RIAs may list "tax planning" in their brochures, yet the services provided differ drastically.

Although many advisors are deservedly proud of the capabilities they offer, the reality today is that even the most complex skill sets can usually be acquired, outsourced or built from scratch. While a unique capability may garner a premium, capabilities on their own may not be a major valuation driver.

Takeaway #1: Costs and capabilities are relatively easy to quantify, but their impact on valuation can be hard to predict.


Although less quantifiable than costs and capabilities,leadership can play a major role in a firm's perceived value. To positively impact valuation, however, leaders must do more than effectively run operations and grow revenue. Value-enhancing leaders articulate—and embody—a unique mission for improving the lives of their clients, employees and community.

This type of leadership can strengthen a firm’s reputation and brand in the community, and thus increase its business goodwill.  An accounting term, goodwill is defined as the intangible asset that arises when a buyer acquires an existing business but pays more than the fair market value of the net assets. Qualities such as leadership, reputation and goodwill may be intangible, but they should nonetheless be recognized – and respected – for their ability to influence valuation.

Leaders also add deep and lasting value when they focus on attracting the best young talent and give them important roles in the firm’s development. Having strong next-gen leaders is critical to a firm's long-term trajectory, ensuring both stability and innovation in meeting  future challenges.

Takeaway #2: Leaders who build goodwill and attract next-gen advisors with a forward-looking strategy can significantly boost a firm’s valuation.


Client demographics are another variable factor that can forecast your firm's trajectory. An upward curve consists of younger-than-average clients with bigger accounts and longer tenure at your firm. They have multi-generational accounts and make larger asset additions. Flip those factors and you have a downward path of older-than-average clients, lower account sizes, shorter tenures and high levels of asset attrition.

Some buyers have detailed models to predict how client accounts grow or shrink over time, based on demographics. To set their client demographics on that upward trajectory, advisors should be proactive in using marketing, sales and referral tools.

Takeaway #3: Client demographics are a signpost that can show the direction your firm’s valuation will take.

Now consider the importance of the client experience, which is the sum of all points of contact a customer has with your company. Valuation can be boosted when you segment your target markets by value, growth potential and fit, and then offer distinct client experiences to each of the different groups.

Advisors should also recognize that having a monopoly on their clients’ attention could hurt their firm. Adding junior advisors, developing functional teams and strengthening the role of service representatives will increase value to customers while allowing you to leverage greater operating flexibility. 

Takeaway #4: Valuation can be enhanced if the client experience is strategically segmented and client relationships aren’t locked up with individual advisors.

The bottom line: When variable drivers are in place to support strong fundamentals, your business is positioned to thrive, both today and over time. The “curb appeal” of your firm will reflect its solid foundation, whether or not you’re aiming for a sale.

David Canter is EVP, Practice Management and Consulting, for Fidelity Clearing & Custody, where he is responsible for leading the development of a comprehensive Practice Management program structured around helping advisors accelerate growth, streamline their operations and manage risk.

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