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Selling your registered investment advisor (RIA) practice or wealth management firm is a significant decision that many advisers are considering in today’s thriving M&A market. The industry has experienced a surge in merger and acquisition activity, with a record-breaking number of transactions completed last year. This growing trend indicates ample opportunities for those looking to sell their firms.
However, selling a business that you’ve built and nurtured over the years is not a task to be taken lightly. It requires careful planning, patience, and expertise in deal-making and securities laws. To ensure a successful transaction and the satisfaction of all parties involved, it’s crucial to keep three key points in mind.
- Assess your objectives prior to joining the selling wave.
Before jumping on the bandwagon and selling your practice, take the time to assess your goals and objectives. Selling your entire firm may not always be the best option. Consider alternative routes, such as a partial sale, taking on a minority stakeholder, or outsourcing certain services. By clarifying your desired outcomes and evaluating your timeline and control preferences, you can make a more informed decision. - Explore strategic options beyond internal sales.
While selling internally to a specific person or within your practice may seem appealing, it’s essential to plan well in advance. Waiting too long or neglecting to prepare a succession strategy can lead to challenges and missed opportunities. Selling externally often yields higher valuations, especially as the firm’s assets under management (AUM) increase. Ensure that you have a well-thought-out plan in place to increase your chances of reaching your goals. - Evaluate buyer fit and transition impact.
When choosing a buyer for your firm, it’s important to consider more than just the financial aspects. Evaluate what resources, experience, and support the buyer can bring to the table. Determine the impact of the acquisition on your role, decision-making authority, employees, and clients. By aligning your expectations with the buyer’s vision and values, you can secure a successful transition that preserves your business’s legacy.
Hire A Dedicated Transition Team
Hiring a dedicated transition team is highly recommended when navigating the complexities of the sale process. AdvisorLaw specializes in valuing advisory practices and negotiating on your behalf. Our commitment to achieving your desired price, terms, and goals ensures a smooth transition and maximizes your chances of a successful sale.
Expertise In Tax Considerations
Taxes play a crucial role in any deal, impacting your return on investment. AdvisorLaw understands the significant effect that taxes can have on your profit and works closely with tax professionals to consider the tax treatment of the sale. By articulating costs and terms upfront and seeking professional advice, you can optimize your return and avoid potential tax pitfalls.
AdvisorLaw’s Practice Purchase Network (PPN)
Our PPN network spans the country, connecting sellers with potential buyers and providing services such as contract preparation, complimentary business valuations, and succession planning. We offer end-to-end management of your transaction for a seamless process.
Understanding The Value Of Your Wealth Management Practice
Whether you are making internal equity decisions or considering the sale of your financial advisory practice, it is crucial to understand the methodology for valuing a wealth management firm. The value of an RIA firm depends on various factors, and a thorough evaluation is essential to ensuring a fair and accurate assessment. Here are a few key considerations and valuation methods that are used in the process.
Factors Impacting The Value Of An RIA Firm
Growth
The growth potential of a firm significantly influences its value. Key considerations include the rate of client attrition, assets added annually, and the demographics of the client base. Understanding and projecting future growth prospects is critical to accurately determining the firm’s value.
Profit
Profitability plays a vital role in the valuation of a wealth management practice. Factors such as fee schedule, advisor payout model, and EBITDA margins are assessed, in order to evaluate the firm’s financial performance. Profitability directly affects the firm’s value and is a key aspect of the valuation process.
Risk
Evaluating the level of risk associated with a wealth management firm is crucial. Factors considered include revenue concentration, investment philosophy, and the effective use of technology. Assessing risk helps determine the firm’s stability and potential for long-term success.
Valuation Methodology
Multiple Of Revenue
One commonly used method for valuing an RIA firm is applying a multiple to its revenue. The multiple can be based on trailing 12-month (TTM) revenue, a 3-year average, quarterly annualized revenue, or projected 12-month revenue. Higher multiples are typically applied to recurring revenue, while lower multiples are used for transaction-based revenue. Combining these values provides the total valuation of the advisory firm. However, using revenue alone fails to consider other unique aspects of the firm.
Multiple Of EBITDA
EBITDA (earnings before interest, taxes, depreciation, and amortization) is another commonly used metric for valuing wealth management firms. It measures operational performance by eliminating financing costs, non-cash expenses, and taxes. Applying an earnings-based multiple provides a more accurate assessment than a revenue multiple. However, it still does not capture all the unique aspects of a wealth management firm.
Discounted Cash Flow
The Discounted Cash Flow (DCF) method involves projecting the firm’s future financial performance based on historical data, discussions with management, and a thorough understanding of the business model. Cash flows are then discounted to their present value using a discount rate that reflects the perceived level of risk. The terminal value is added to the discounted cash flows to determine the final valuation. DCF takes into account various factors specific to valuing wealth management firms and provides a comprehensive assessment of the business.
Third-Party Valuations
Third-party valuations, conducted by recognized firms with expertise in the RIA industry provide an objective assessment of the firm’s enterprise value. These valuations often serve as a negotiation starting point and are required by banks and lenders during the underwriting process. While they provide a useful benchmark, the final sale price may differ from the third-party valuation.
Partnering With AdvisorLaw For Valuation Assistance
Obtaining an accurate valuation is crucial to maximizing your sale price and enhancing your firm’s value. In collaboration with Clifton Larson Allen (CLA), a top CPA firm, we provide a customized valuation tool tailored specifically for wealth management practices. Our comprehensive reporting includes SWOT analysis, industry comparisons, deal scenarios, and hypothetical tax scenarios — all at no charge to the seller. By leveraging our valuation expertise, you can identify areas for improvement and enhance your practice’s profitability prior to the sale.
Contact AdvisorLaw Today!
Selling your RIA is a significant decision, and AdvisorLaw can provide the guidance and expertise necessary to navigate the process successfully. Our comprehensive M&A consulting services, accurate valuations, dedicated transition teams, and expertise in tax considerations will help you to achieve your goals and make a smooth transition to the next phase of your career.