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What Is The Value Of My RIA?

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Whether you’re making internal equity decisions, or selling your investment practice, understanding the methodology for valuing a financial planning business is critical to make the right next step.

What impacts the value of an RIA firm?

While the final sale price of an RIA firm can only be determined by negotiations between buyer and seller, and depends heavily on how the transaction is structured, the value of any business comes down to three main factors:

  • Growth
  • Profit
  • Risk

How these factors are assessed is unique to each transaction, but the following are a few key considerations that are widely used during the valuation process:

Growth

  • Rate of attrition
  • Assets added annually
  • Client demographics

Profit

  • Fee Schedule
  • Advisor payout model
  • EBITDA margins

Risk

  • Revenue concentration
  • Investment philosophy
  • Use of technology

Valuation Methodology

Multiple of Revenue

One of the simplest methods to value a wealth management firm relies on a multiple of revenue. This multiple is most often applied to Trailing 12-month (TTM) revenue, but may be applied using 3-year average revenue, quarterly annualized revenue, and projected 12-month revenue.

The actual multiple applied to determine the value of the practice depends on how the revenue is generated. In general, a higher multiple is placed on recurring revenue (fee-based), and a lower multiple is placed on the portion of revenue that is transaction-based. The resulting values are added together to determine the total value of the advisory firm.

One problem with a revenue multiple is that it fails to consider other aspects of the wealth management firm that make it unique when compared to its peers. Consider the following example:

Comparison multiple revenues

Since both RIAs have the same revenue so if we relied solely on a revenue multiple, we would value each advisory practice the same. But a quick look under the hood would reveal very different expense structures, resulting in very different profitabilities.

Multiple of EBITDA

EBITDA stands for Earnings Before Interest, Taxes Depreciation & Amortization. It is a measure of earnings that eliminates financing costs (interest), non-cash expenses (depreciation & amortization), and taxes. It is often used in the valuation of a financial firm’s operational performance because it removes the impact of the management decisions mentioned above. Many of the earnings-based multiples you see for RIAs are based on EBITDA.

While an earnings-based multiple is often more accurate than a revenue multiple, it still fails to accurately assess all of the unique aspects of a wealth management firm. Consider the following example:

Comparison cash flow multiples

Once we move beyond profits and explore other aspects of the financial practices, we can see that the growth of the two firms has been quite different over the past few years. RIA 1 could also have a very high percentage of revenue generated from its top 5 clients leading to higher risk. These are just a couple of examples related to growth and risk, but many of the factors listed above could impact an investment advisory firm's value.

The advantage of using multiples, including revenue, EBITDA, and others, when valuing an RIA is simplicity. One can get a quick “ball-park” valuation of the practice by doing elementary math. But when it comes to making important decisions multiples fall short of assessing the unique aspects of each financial planning firm.

Discounted Cash Flow

Another method often used to value financial advisory firms is the Discounted Cash Flow method, which uses historical performance, discussions with management, and a thorough understanding of the specific business model to project future financial performance over a defined period. One then calculates a terminal value and discounts all resulting cash flows to present value utilizing a discount rate that reflects the perceived level of risk present to that specific company. The final value is the terminal value plus the discounted cash flows.

While this method does rely on some assumptions and predictions, it allows a valuation expert to more thoroughly assess the business as a whole. The specifics of a good Discounted Cash Flow valuation can be quite complex and will involve many relevant factors specific to valuing wealth management firms, which is why it’s often best to utilize a valuation expert.

Third-Party Valuations

Third-party valuations are utilized as a gauge of the firm’s enterprise value for several M&A participants and are often a starting point for negotiations. While this valuation reflects what one might expect using an “average” deal structure, it rarely reflects the final sale price.

A significant majority of banks and other lenders require a third-party advisor valuation service for assisting their underwriting team. Banks are very judicious in selecting valuation firms consequently, it is important to retain an RIA valuation from a recognized firm with expertise in the RIA industry. Please contact our Credit Team at underwriting@skyview.com to receive a list of approved valuation firms.

FAQ's

Does SkyView perform RIA valuations?

SkyView does not provide third party RIA valuations. Our network of bank partners requires a third-party RIA valuation for each wealth management loan. SkyView has partnered with a number of the leading RIA valuation firms across the nation and can help financial advisors choose an advisor valuation partner that is best suited for their RIA loan.

In general, what is an advisory practice worth?

Often, advisory practices with a larger portion of their revenue generated from recurring advisory fees attract higher valuations than revenue from non-recurring resources. RIA valuations and multiples vary based on a number of factors.

What are a few of the key factors that these valuation firms use in valuing financial advisory firms?

Here is a list of some of the key factors that drive valuations:

  • RIA practice AUM
  • RIA practice revenue
  • RIA practice EBIDA and EBOC
  • Client demographics
  • Revenue attribution between fee and/or transactional
  • Client service model
  • Rate of client attrition
  • Amount of new assets added annually
  • Fee schedule
  • Investment philosophy
  • Advisor payout model
  • Use of technology
  • Staff relative to households

What is the most accurate method of valuing a financial advisory firm?

SkyView relies on the expertise of our third-party RIA valuation experts to determine the value of each RIA practice. Each RIA valuation firm utilizes a proprietary valuation methodology, but commonly use a multiplier on revenue or EBIDTA.

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