Five Keys To Boosting Your Valuation Ahead Of A Sale

Janeesa Hollingshead, Executive Editor, Wealth Solutions Report

Strategic Consultant Explains How To Boost Firm Valuation, The Value Of Being A Business Vs. A Practice, Who’s Experiencing Growth And Overlooked Advantages Of Organic Growth

It’s a well-known statistic in wealth management that the average advisor age is in the upper 50s, and for many advisors the pull of other priorities grows stronger as they mature – whether it’s grandchildren, the golf course, a volunteer organization or just enjoying quiet sunsets. 

Many advisors wait until something forces their hand to prepare for retirement, but for those willing to prioritize it early, higher multiples and valuations are within reach, improving the lives of the retiree and family as well as the firm’s employees and clients.

Bill Van Law, founder, WVL Group

Bill Van Law, the founder of wealth management consultancy WVL Group, served 15 years in executive positions at Raymond James and 18 years in the Private Client Group of Merrill Lynch. Founding the WVL Group in 2018, Van Law now counsels financial professionals and firms in strategic growth and development, organizational change and succession planning.

We caught up with Van Law to ask his advice on boosting a firm’s valuation for succession planning, how to achieve growth and higher margins and the pros and cons of organic and inorganic growth.

WSR: What are the top five keys to boosting a financial advisory firm’s valuation during the succession planning process?

Van Law:  Our work with advisors over the years has provided a front row seat regarding the most effective strategies to drive growth and improve valuation. Over time, we found that there are five key elements that separate the most valuable firms from the rest. 

While none of these should come as a surprise, the best firms develop a winning strategy and then execute at a high level. Simple, but difficult – which is why these firms receive a premium valuation during the sales process. 

In our work transforming organizations, the focus is on strategy and execution, as these primary differentiators lead to sustained results. 

The best firms strategize

Create A Plan: The best firms drive long-term success by being thoughtful and deliberate about strategy and creating a tactical plan to achieve objectives.

Track Results: Creating and monitoring key performance indicators remains one of the true fundamentals of long-term success. Tracking outcomes, including individual contributions, is critical to creating a performance-based culture and improving results. 

Build A Team: The quality of the team will largely determine success in driving change and achieving improved results. In the end, it’s all about the people, as you can’t drive results without the right team. 

Efficiency Matters: Delivering a world-class client experience consistently across the organization impacts a firm’s ability to achieve sustained growth and profitability. The best firms use technology and process to drive efficiency, enhance the client experience and increase margins. 

Quality of the team

Think Long-Term: Great businesses to own long-term earn a premium valuation when it is time to sell. They produce high current income (EBITDA) with solid growth rates, commanding a higher valuation as scale and growth drive a higher multiple during the sales process. 

WSR: What is the difference between a practice and a business, and how does this impact valuation?

Van Law: While there is an active market for both, a vibrant and growing business will command a higher valuation than the typical independent wealth practice. Key differentiators between practices and businesses are scale and growth, which also happen to be the primary drivers of increased valuation. 

Most practices evolve over time, as market forces, technology and new resources provide enhancements in the ability to serve clients. For many owners, this slow evolution is ideal, given the strong cash flows of a mature practice and the growth experienced during the long bull market. 

As practices mature, growth trends decelerate, as referrals typically become the primary source of new clients. There are many benefits to owning a great practice, and this is the primary path for most advisors. 

The transformation from an independent practice to a private wealth firm requires the owner to evolve from advisor to leader, shifting from working directly with clients to building and developing a team and driving results through others. 

Many prefer slow evolution

As practices evolve into businesses, clients connect to the firm rather than the founder. Teams and processes provide additional depth and expertise to better serve expanding client needs. Successful businesses also employ proactive growth strategies rather than rely on passive referrals. 

This combination often leads to higher profitability as these best practices drive growth and efficiency, leading to better margins and a higher valuation for the firm.

WSR: Growth in the RIA space makes frequent headlines. Are most firms really growing this fast?

Van Law: The RIA channel experienced exponential growth in recent years. RIA firms now serve $6 trillion in client assets, up from less than $1 trillion in 2002 – a sevenfold increase. This tremendous growth resulted in an expanding number of regional and even national firms benefiting from these trends. 

Despite these facts, growth has been very concentrated. The top 6% of firms gathered 76% of net flows over the past year. 

Top firms intentionally drive growth with dedicated resources, staff and focus from the entire firm – from senior leadership to the administrative team. Leading firms also understand the relationship between growth and consistency of the advice and service model, as great service leads to improved retention, more referrals and better margins.

WSR: M&A deals are highlighted daily. Is M&A the best way for advisory firms to grow?

Van Law: M&A is a great accelerator and one of the primary drivers of growth for many firms. Deal activity, while moderating a bit from the frenetic pace of late 2021, is still setting records. According to ECHELON Partners, we are on track for another record year with 345 deals projected to close in 2022. 

M&A is getting all the attention, while organic strategies – the bread-and-butter growth approach for most firms – get little shelf space. 

While M&A and organic strategies are both effective in driving growth, leading firms understand the benefits of combining the strategies, as they tend to complement each other. The effective implementation of organic growth can enhance inorganic growth (M&A and recruiting) by providing additional potential benefits to prospective advisors. 

Organic growth is also less capital intensive, providing a higher ROI than M&A. In the end, both are effective, and while the ROI may be higher with organic strategies, inorganic often results in higher growth rates – which is why many top firms utilize both to maximize growth, preserve margins and drive higher valuation.  

Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com

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