© 2019 SourceMedia. All rights reserved.

How to Maximize Your Firm's Value for the Long Term

In the quest for success, the smart money has always gone to solid planning and forward-looking analysis.

Consider politics: The presidential election is well over a year away, but candidates have been laying the groundwork for their campaigns for years, even decades.

In Hollywood, executives are lining up blockbusters for summers to come.

And, even though baseball season is still in full swing, front offices across the country are mining Moneyball sabermetrics to find World Series stars for next year and beyond.

What applies to politics, entertainment and sports also holds true for advisors whose "big wins" are building, growing and maybe even one day selling their RIA firm at an optimal price.

You might get lucky, of course, and, like J. Pierrepont Finch in the Broadway classic, succeed in business without really trying. But counting on that is like counting on winning the lottery to fund your retirement.

Even if selling isn't on your short-term horizon, it's vital to understand the impact that different drivers have on your firm's valuation. After all, valuation is a reflection of the preparation you took to build your business and set your firm apart.


Fundamental drivers -- size, revenue (including growth and profitability) and organization -- are important to all would-be buyers. Even if your firm is not on the market, these factors can help determine its competitive vigor. They're the can't-miss metrics that show how vibrant a company actually is and how bright its future could be.

Size is the holy grail of valuation, akin to sitting in the Oval Office, smashing a Hollywood box-office record or bringing home the Commissioner's Trophy. You don't get to scale without getting a lot of other valuation drivers right.

And there's no way around it: Bigger is better.

Bigger firms have more clients to drive revenue. They have greater client diversification to mitigate losses. They have larger staffs so they can add more services and expand their reach. And they can leverage more resources to build their client base without adding significant new costs.

But RIA firms can improve other valuation drivers to fuel their overall growth.


Revenue means more than just this quarter's bottom line. A firm's potential for growth and profitability plays a significant role in its valuation. To evaluate these factors, take a long, hard look at your revenue drivers.

Does your firm have plenty of talented people working toward a shared goal, or is it centered on one or two rainmakers?

Do you have consistent processes for IT, human resources and operations, or are you reinventing the wheel with each new client, hire or tech upgrade?

Can you raise revenue and profitability with new services and capabilities?

How strong is your firm's market recognition, and can all team members serve as persuasive ambassadors for your brand messaging?

The answers can tell the tale of a company whose best days are ahead of it -- or behind it. Having in place the right people, processes, capabilities and marketing can help ensure future growth and profitability.


Implementing an effective pricing structure is also a core component to revenue. Fees that are over or under market rates can negatively impact profitability today and into the future.

"When our firm looks at potential investments, we do a detailed analysis of each client relationship in the context of overall firm growth and potential," says Mark Hurley, CEO of Fiduciary Network, a Dallas-based financing partner for wealth managers. "Now, more than ever, the smart money is focusing on valuation."

Adding new services and capabilities -- such as estate, tax or retirement planning -- can be valuable to the profits of a firm, but only if the offerings are a natural fit. If taxes bore you, for instance, and you don't have the staff to handle an increased workload every spring, this service may end up costing you more in morale and client goodwill than you intended.

New capabilities have to match your firm's existing skills, client demographics and partnership opportunities. In other words: Don't position yourself as a popcorn flick when you're angling for an Academy Award.

Evaluating your organization includes both the quality of your team and the culture of your firm. These are inherently soft metrics, but you can usually tell a healthy company as soon as you walk into its offices. Phones are ringing, people are active and someone is there to greet you.

You can sense work being done and tell when people are happy to do it.

Culture is an overused buzzword, but it sets the standard for how individuals and teams work together. When clients come to you with complicated situations and complex needs, your team must be willing to work together to get them solutions -- seamlessly.

Firm size, revenue and organization are usually top-of-mind for RIA owners, whether their five- year plan includes a sale or not. Focusing on these fundamental drivers won't change the value of your business overnight. But playing the long game can set you up for success on your own terms.

And, for most advisors, that's the big win.

David Canter is executive vice president, Practice Management and Consulting, for Fidelity Clearing and 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.

Read more:

For reprint and licensing requests for this article, click here.