As we move into 2009, many independent financial advisors are looking at their business strategies and trying to figure out how to grow this year and in the years ahead. The recent market turmoil has reinvigorated some of them.
But at the same time, advisors overall are getting older, and for other firm owners, this is a good time to consider exiting the stage and leaving the stress behind. Selling the company has often been a good choice-just one among a range of good options that also include merging or consolidating with larger strategic partners.
That naturally leads one to wonder: "In this environment, what's the value of my firm?" and "Are there still active buyers?" Until mid-2008, the elevator was moving up, there was no rush, and many owners planned to ride it out for a few more years before selling. Now the elevator has taken a sudden and jarring drop, and it looks compelling to sell sooner rather than later. Fear has gripped many as their revenue has declined.
So what alternatives are left for an owner of a firm that is suddenly two-thirds the size it was a year ago? And at a time when that firm might not be nearly as fun to manage?
Unfortunately, the old assumptions about a firm's value have to be tossed out, and advisors must deal with new ones. To do this means looking at several trends. The good news is that many of these new realities actually bode well for financial advisory firms' current and future value. Namely:
There is a surging wave of clients that need advice more than ever before.
Many high quality advisory firms are capable of serving these clients.
There's a promising future for the investment advisory industry.
A variety of well-qualified buyers are still looking for opportunities.
For an owner considering the sale of her firm, we provide the following guidance, based on our experience and recent studies.
Be Part Of A Growth Business
In this market, clients are acutely aware of their need for good advice. We have often said, "There is no shortage of clients who need advice; there is only a shortage of people to render it." This is truer now than ever before. So the future is bright for the advisory business. Moreover, the opportunity to grow with the industry is significant, and good firms will show that. The stock market is in the process of resetting itself, and this creates opportunities for agile advisory firms that can adjust and grow from the new starting point. We occasionally see firms where owners focus only on harvesting business from existing clients, and as a result see assets gradually decline, limiting their future opportunities. It's growth that attracts buyers, and today's market condition offers that growth opportunity. Be a participant in it.
Value: A Function Of The Future
We have found that prospective buyers place value on your firm's future transferable earnings, and that the purchase price will not be determined by the earnings of the past. In the lexicon of the M&A world, the "measure of the market" has often been multiples of trailing revenues-values that are easily communicated. These, however, are used mainly by sellers who seek reassurance about the value of their practices. And when it comes to consummating a transaction, Moss Adams has discovered these problems with using revenue multiples as a guide:
They measure the past, not the future.
They are rarely used by knowledgeable buyers.
They do not focus on transferable earnings.
They do not consider the schedule and timing of payments.
They do not differentiate between contractual and contingent payments.