Guidance on How to Value an RIA
A recent white paper provides guidelines for how to value an advisory firm when considering sale. The paper describes the three main drivers of a firm’s value: cash flow, growth, and risk. The paper offers several factors that could drive up a multiple: (1) larger firms provide more predictable future cash flow; (2) track record of revenue growth; (3) fee-based over commission revenue; (4) independent RIA model; (5) client concentration, tenure, and age; (6) multiple service offerings; (7) key person risk; (8) expense management; and (9) employee demographics. The paper says that a potential buyer will value a firm based on a revenue multiple, cash flow multiple (EBITDA or EBOC), or discounted cash flow. The white paper was prepared by the Alliance for Registered Investment Advisers, a self-described think tank composed of large advisers and a consulting firm.
OUR TAKE: We have witnessed what the paper describes as the “multiple gap” where advisers value their firms at a multiple far greater than any potential buyer. An adviser could use this paper as guidance to start building a higher-value firm.