Acquirers obviously look at recurring revenue, but they also look at where the revenue is coming from, Silverman said. If 5% of the revenue comes from one or two wealthy clients, the firm is not going to worth as much as it would with a more even spread of revenue across a number of clients.
Silverman said Bluespring Wealth Partners does an "asset walk" when looking at a prospective purchase to determine how revenue is generated.
A firm’s growth can come from adding wallet share from existing clients, from market growth and from adding new clients. “If too much of the firm’s growth is coming from growth in the market, we would look skeptically at it,” he explained.
Likewise, if the business has stopped growing through acquisition of more assets from existing clients or adding new clients, the owner needs to re-invigorate the firm by actively searching for new clients—something that may have fallen by the wayside over the years. A firm that has strong, long-term relationships with the families of clients also will be worth more to the buyer, Silverman said.
Advisory firm owners should look at profit and loss like any other business, he noted. Problems that can be discovered include under- or overcharging clients or providing services that are not compensated for. If those thing are found, the owners need to adopt more efficient practices and make the needed changes before trying to sell.
Undercharging clients cannot be fixed immediately. Instead, advisors need to explain to existing clients the value of their services so that fee structures can be amended.
In addition, a firm's owner should have a business evaluation done every couple of years “just to see where they stand," Silverman said.
“We are seeing a lot of M&A activity in the industry and we expect more to come,” Silverman said, adding that Bluespring Wealth Partners has several deals in the pipeline.