Valuing an RIA reminds me of the classic western The Good, The Bad and The Ugly. You may recall the story of three distinct characters racing to dig up gold buried in a graveyard. Each of the characters is a succinct manifestation of the different ways to value an advisory firm:
Despite the near-universal acknowledgement that the archaic two times revenue formula is the wrong way to value an RIA with over $100 million in assets, some advisors still have hesitancy to use the discounted cash flow technique. Perhaps it is because the approach seems complicated, while the comparables approach is so simple. Sure, its easy to value a firm based on two times revenue or five times cash flow. But sophistication trumps simplicity for important matters, and valuing your biggest asset or investing your life savings to buy equity in a firm is vital.
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