© 2020 Arizent. All rights reserved.

Prospective sellers should start increasing the firm’s value now

Register now

Advisers who plan to sell a firm in a few years should start increasing its value now.

And as in any other realm, the first step on the path to improvement is gaining awareness of the current situation.

The good news is that a comprehensive valuation not only allows a precise understanding of what the firm is worth, it also provides clarity into what drives value. And from this awareness, an adviser can craft well-structured strategies to improve the value.

Valuation is extremely complex, but ultimately the value drivers for a registered investment adviser boil down to three key areas: growth, profitability and risk. The ability to increase growth and profitability and mitigate the company’s risks will directly increase the value of the firm.

Growth isn’t a single number. Like a rope that can pull up the value of the company, it comprises several strands that are entwined. Improving new client growth is as important as minimizing the attrition rate.

Monitoring and responding to the leaky bucket of client draw-downs is as important as targeting clients in their prime earning years who are socking away their annual bonuses. Gaining clarity regarding how the firm compares with others on these and the other 12 growth benchmarks will help an adviser zero in on areas that need attention and allow focusing on targeted strategies.

Profitability is what pays back investors on their investments. That is why the ‘multiple of revenue’ valuation technique is useless.

Profitability is also a basic metric of the company’s health. Poor profits generally mean poor management decisions or processes.

A discounted cash flow valuation provides the required level of detail and the timeframe to start making the best decisions for the firm. A good valuation will help advisers understand where they are spending too much, when the should be hiring the next employee and even when they should expect an employee to hit a promotion.

Ultimately, the forecasting component of a discounted cash flow valuation will serve as a mini-business plan, allowing advisers to anticipate expenses and decisions that will need to be made.

Risks are the darker side of the valuation equation and often live in the shadows. Many firms continue to operate for years with key risks unaddressed in management’s blind spots.

A comprehensive valuation will help management engage with the cold reality that a continuity plan still isn’t in place, that the non-competes/non-solicits still haven’t be signed and that employee turnover is more than an inconvenience. Engaging with the fact that the company has a concentrated or aging or client base will help put the adviser on the track to solve these risks.

Every company has risks. The adviser’s job is to be aware of them and eliminate any possible.

On a continuing basis, advisers who decide it is time to sell immediately regret that they are out of time to improve valuation. Start improving the valuation today.

The firm will not only be better positioned for a sale in the future, but it will be better and more profitable for the years until then.

This story is part of a 30-30 smarter succession planning.

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