At some point near the end of a firm’s life, its revenue becomes stagnant, Grau writes, and loyal clients are not referring new business. A buyer is not looking at profitability at that point anyway—he or she is looking at a client base to fly on the new owner’s airplane. The growth is going to come from the buyer in the future, and revenue is still a good snapshot to buy.

Marty Bicknell, the founder and CEO of Mariner Wealth Advisors in Overland Park, Kan., said, “I have heard consultants and M&A advisors pitch discounted cash flow and various other extreme and sometimes complicated methods to value a deal. Personally, I don’t think it’s worth the effort.”

“If you are acquiring a book, team, or a firm and integrating them into your compensation model, back office support and overall structure, then nothing else but recurring revenue matters,” Bicknell said in an e-mail. “It’s perfectly fine to put a revenue multiple on that opportunity.”

He said Mariner targets a specific cash-on-cash return “based on existing cash flow that we are buying. We don’t give any value to future growth projections, etc., because we assume we will be driving it. Growth is why we are being chosen. We have proven an ability to drive significant growth post-deal. The bonus is … it’s easy math.”

“Say I want a 20% cash-on-cash return. That’s a multiple of five times net cash flow—seven times is 14.3%. If we value the business based upon recurring revenue that’s easy as well. We take the advisor’s revenue, plug it into our operating model metrics, and we can calculate a net cash flow number that we then convert to a revenue multiple. For example, a 45% margin at a multiple of five times cash flow equals 2.25 times revenue.”  

His last thought is, “Keep it simple and don’t over complicate the transaction. Focus on the goal for the deal in the first place.” 

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