Advisory Practices Have No Value?!
Created: Monday, 23 August 2010 11:58
Written by David Grau Sr., JD
FP Transitions works with over 1,200 advisors every year to perform formal valuations, set up continuity and succession plans and to implement internal ownership tracks and equity compensation systems. We work with sole proprietorships and firms of 40 or more staff members; some have 30 clients and some have upwards of 5,000 clients; some generate gross revenues of only $75,000 a year, while others generate $15 million+ a year. Most of our clients have practice values between about $600,000 and $6 million or so.
Every one of these independently owned financial advisory practices has real value – if they didn’t, we wouldn’t be working with them. That said, every one of these independently owned financial advisory practices can lose or imperil that value in a heartbeat. Never forget that we’re talking about professional service business models, most with just one primary owner, and all of the assets are intangible.
By our yardstick, measured over the course of the past decade, less than 10% of advisors have a written succession plan that complies with SEC/FINRA rules and regs, names a specific successor and is supportable from an after-tax cash flow perspective. Less than 4% of advisors have ever had a formal, professional valuation of their practices. Less than 1% own their own building. Not a real business? Who’s to say. We’re talking about real, hard earned income to be sure, and often its recurring income that surpasses virtually every other professional service business model in this country (think lawyers, CPA’s, accountants, doctors, veterinarians, dentists, etc.), with lower overhead and fewer, high net worth clients and households.
When we list practices for sale, or we work with bank underwriters to fund transactions between advisors, we see real value, and we see an average of 48 buyers per seller. Here’s a question: If you were to list your home for sale and you had 48 buyers lining up outside to walk through in the first week of your listing, what conclusion would you draw about the value proposition of your financial advisory practice? Or perhaps you’re like most advisors I speak with who receive 4 or 5 unsolicited letters a year from consolidators or interested buyers? Are they writing to you over and over again because they think you have no value? I don’t think so.
The opinions on value that you’re reading from time to time come from businesses interested in acquiring your advisory practice. What did you expect them to say? That you’re undervaluing your business? Every year, one buyer/consolidator model or another publishes a story about values being too high. Since we see values from between 1.3 and 3.2 (using a multiple of gross revenue derived from a formal valuation study), and sales ranging from death, disability, and regulatory incidents to well planned, gradual succession plans of great businesses to third-parties and family members, I’m not sure exactly how general or generic these expert opinions are, or even what facts they’re basing their opinions on. Do you?
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