Take two organizations that look like they have the same value. What if one of them had to pay two extra expensive employees to get the same revenue? Should they both be priced the same? Employees are a big factor, since they often represent about 75 percent of expenses.

The third way to value a firm is to use discounted cash flow, which DeVoe said was the most accurate method for RIAs. The process includes looking back historically at what has happened with a firm, then projecting into the future five years and, lastly, discounting back to the present, discounting out the risk. “We look out five years. The crystal ball gets a little cloudy after that,” said DeVoe. He recommended using EBITDA. For the discounted rate, DeVoe said in different deals he has seen it go from zero to 50 percent, with many of the deals clustering around 25 percent.

The valuation process can also help an owner figure out whether improvements should be made before he or she sells the firm. Growth factors like new clients, the makeup of current clients, retention, attrition and even acquisitions can play a part in the ultimate value.

As far as the emotional connections sellers have with their businesses, DeVoe laughed, saying, “We joke we are a therapist with spreadsheets.”

Some of the attendees at the presentation wondered whether valuations are more of an art than a science, suggesting the numbers can be tweaked one way or the other. DeVoe agreed that each seller has a critically important element that forces the deals to get creative sometimes. On the other hand, he hinted he has a model with over 3,000 cells in it that would suggest how much of a discount a buyer should get, even if the seller does not sign a non-compete.

DeVoe said a well-thought-out business plan for growth is better than one person making all the sales because he is charismatic. All firms should be looking to maximize their values, so a process used now gets a buyer to pay more in the future.

“Maximize the value of the company,” recommended DeVoe. “Every 1 percent increase in growth creates a 5 to 10 percent increase in value.”

Think Strategically

Laura Kogen, a VP in the Practice Management and Consulting group at Fidelity Institutional Wealth Services, conducted a strategic planning workshop for principals and owners.

She opened her presentation by saying, “Stop for a minute and think of a better way.” Too often, advisors do not carve out enough time to work on their business and do the strategic planning they need in order to rise to new levels.