A financial advisory firm does not have a fixed value, according to principals at Echelon Partners, a consulting firm for wealth advisory businesses based in Los Angeles.
The value of a firm depends on where it is in its life cycle and what change is anticipated, said Daniel B. Seivert, CEO and managing partner at Echelon Partners. Seivert and Tyler Resh, principal at Echelon Partners participated in a recent webinar for financial advisors sponsored by Schwab Advisor Services.
The value of the firm depends on if it is being bought, sold or merged with another, Seivert said. And it depends on whether there is a willing seller and reluctant buyer or vice versa.
There are also some misconceptions that frequently get in the way of setting a fair market value, Resh said.
"Buyers frequently forget to determine the equity value of staff members who may leave if a firm is sold," he said. Another often forgotten fact is that "the value of technology goes beyond what the hardware costs if it is best-of-breed technology that adds to the business."
Some things like the number of firms being offered for sale are not in the firm owner's control, but most factors that determine value are in his control, Tyler said.
An owner who has grown a firm to the point where it provides a good living and stopped seeking new clients has hurt the value of firm, they said. Growth adds to value because firms should be valued on the upcoming revenues rather than the past revenues, Seivert said. If a firm has stagnated, "go back to the original business model to generate growth and add value," he said. "You are not going to get the premium for a firm that has stopped growing that you will get for one that is still growing."
The demographics of the clients of a firm need to be examined before a value is set, Resh said. "Having older clients may not be bad if the firm has a good relationship with the families and will likely retain the next generation as clients," he said.
"Knowing how valuation works allows you to plan ahead to drive the value of your firm," Seivert said.