Usually around year end I attempt to reassess the valuation trends within Financial Advisor practices.  Obviously, the most telling indicator becomes the actual negotiated “sales prices” of current business acquisitions.  However, that is not generally public information and it is never really that simple as there are so very many diverse factors…  Not to mention, every single transaction is unique unto itself. 

That said, I will share my “aggregated compilation” for what I believe to be representative of the marketplace.  But please keep in mind, if you are in an “acquisition (buyer) mode” you may look at this from one perspective…  And if you are in “liquidation (seller) mode” you may look at this from another perspective.

Regardless, here is my “consultant’s perspective” along with notes regarding fluctuation forces. 

Assuming a High Quality Practice:

• Almost 100% of transactions are now “seller financed”.
• Most transactions are 7-10 year payout deals (used to be more commonly 5-8 year deals).
• Valuations since the crisis are creeping upward (but so is length of deal, so that helps drive numbers up too).
• Number of acquisitions per year has been creeping upward.
• Approximate gross revenue multiples for a high quality practice…
  • Proprietary AUM recurring revenue multiple X 3.00
  • General AUM recurring revenue multiple X 2.50
  • Securities non-recurring revenue multiple X 2.00
  • Fixed Insurance non-recurring revenue multiple X 1.50
• Practices should be priced and/or valued as an average of two or three core valuations…
  • Total revenue valuation (see above multiples)
  • Gross profit valuation (not always applicable for owner/producer practices)
  • Operating profit valuation

The reality is that every practice is both strategically and structurally different.  In some instances, the firm’s infrastructure and/or strategic positioning can be an advantage – or result in “premium” pricing.  But in other instances, the lack of infrastructure and/or strategic positioning can be a disadvantage – or result in “discount” pricing.  My above assessment assumes a high quality practice (most similar to those who tend to affiliate and partner with us) and therefore one could argue it has a bit of “premium” pricing already built in…  But that’s not to say that there couldn’t be even more. 

To try and give a feel for the dynamics that support either premium valuations or discounted valuations I have included my “sweet 16” lists for both perspectives.    

“Sweet 16” DECREASING-Price Fluctuation Factors (can inflate prices by 20%-50% or more):

1. If outside financing exists, price decreases.
2. If time horizon for deal is shorter, price decreases.
3. If practice hinges entirely on the primary owner, price decreases.
4. If practice has few if any systems or processes, price decreases.
5. If practice has few/zero licensed employees, price decreases.
6. If practice is branded to the owner/individual, price decreases.
7. If the overall client’s average age represents the “great nation” or older, price decreases.
8. If few clients result in large percentage of business, price decreases.
9. If diversification of asset/product classes is limited, price decreases.
10. If client interaction is minimal, price decreases.
11. If recurring revenue sources are minimal, price decreases.
12. If client affluence and net worth are minimal, price decreases.
13. If sales process is singular in nature, price decreases.
14. If securities connectivity is minimal, price decreases.
15. If compliance and suitability components are lacking, price decreases.
16. If client complaints are frequent and/or valid, price decreases.

“Sweet 16” INCREASING-Price Fluctuation Factors (can deflate prices by 20%-50% or more):

1. If seller financing exists, price increases.
2. If time horizon for deal is longer, price increases.
3. If practice has multiple influential executives, price increases.
4. If practice has multiple and diverse systems and processes, price increases.
5. If practice has multiple and diverse licensed employees, price increases.
6. If practice is corporately or institutionally branded, price increases.
7. If the overall client’s average age represents “boomers” or below, price increases.
8. If business percentage is diverse and not dominated by a small percentage of clients, price increases.
9. If diversification of asset/product classes is vast and healthy, price increases.
10. If client interaction is regular, intimate and impactful, price increases.
11. If recurring revenue sources are wide and varied, price increases.
12. If client affluence and net worth are healthy and growing, price increases.
13. If sales process is diverse and varied in nature, price increases.
14. If securities connectivity is vast, price increases.
15. If compliance and suitability components are robust, price increases.
16. If client complaints are infrequent and/or invalid, price increases.

As you can see, variations in valuations for both premium and discounted prices is commonplace and widespread. 

In fact, within an article published 2011.10.14 by AdvisorOne, titled, What’s Your Practice Worth…  David Grau, Jr. of FP Transitions is quoted as saying…  “The current range of valuations for firms is in the 1.3 to 6.0 times recurring revenue range, with the average deals done in 2010 at 2.31 times recurring income.  Last year there were 51 buyers for every seller, though (he noted that) in some markets, like California, the ratio could be 85 to 90 buyers for every seller.  The average time on the market was 12 weeks, and the average seller’s age was 57.”

With that said, I must add that Mr. Grau was speaking at a conference as he was quoted in the article, and I suppose he was hoping to drum up a few “new listings” as his buyer-to-seller-ratio seems a bit aggressive to me.  Nonetheless, FP Transitions is arguably the most popular business broker in the Financial Advisor space and probably has the most data on such sales.  I simply question his headcount ratio of what one might classify as “legitimate buyers” for each seller.  Anyway, that’s just me being a cautionary realist rather than an optimist or pessimist (depending on whether you are a buy or seller).    

Regardless, I think this shows that the market is heating up for high-quality practices.

In an ongoing debate between Bob Veres and Mark Hurley, as published by RIA Biz throughout 2011, one could find Mr. Veres in support of quality practices selling from “two-three times gross revenues”, while Mr. Hurley argues that only the upper reaches of Advisors have a marketable practice and to be marketable they must be scalable with infrastructure (something many smaller practices are generally thought to be lacking).

The end result… 

Any way you choose to slice and dice the statistics, 2011 is expected to be the largest buying / selling / merging year ever for the Financial Advisor business.  Congratulations to all who are creating value in their practice!

Best of Biz,

MIKE

P.S.  Given this new data, we will be adjusting our Advisor GAS valuations to reflect such changes as of January 1, 2012.

This information is for licensed professionals only as well as those licensed professionals authorized by Wealthnetic to access these materials. This information is not to be used in soliciting sales from the public.

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