Fee based financial advisory businesses routinely sell for between 2.0 to 2.5 times recurring revenue. But what is the difference between a firm that sells for 2.0 v. 2.5? And how do you push the value of your business further up toward the 2.5 mark and beyond? This article is the first of a 10 part series titled What Is My Business Worth?
As business owners we’re led to believe a business is most valuable when it’s cash flow is strong and it’s staff is busy. But stating the value of your wealth management firm in terms of profits or cash flow creates challenges.
A well-meaning owner can become accustomed to running expenses like boats, cars, and client entertainment through the business. Then when it comes time to prepare the business for sale, trim those expenses and take measures to reduce spending. The result is an increase in cash flow and an illusion of growth.
On the other side, buyers are in growth mode. They’re focused on ensuring the continuity of revenue and service, and energized to innovate. Fresh ideas for marketing plans, client events, and added support staff are tallied up as anticipated expenses. The cost of these programs become factored into the operating forecast, and reduce the amount of money they’re willing to pay for the business.
Focusing on gross revenue, instead of cash flow, gives both buyers and sellers a more accurate value of a business. Fair value is a concept that balances the vision and needs of a new tenure with the track record of current ownership.
As a seller, gross revenue numbers are also the most effective way to communicate your growth projections to prospective buyers. If you’re unsure how to do this your selling consultant can advise you on ways to use generally acceptable assumptions to estimate growth and set realistic expectations.
If you’re gearing up to attract an early- or mid-career Generational Partner, or positioning your firm for a succession plan, we can help you maximize your firm’s value.