Impacts to Practice Value
Practice Drivers
We recently conducted an analysis of 200 of our most recent business valuations to determine what factors influence value, both up and down. You might be surprised at some of the results.
Recurring Revenue
The number one variable that drives value is the amount of earnings derived from recurring revenue. This statistic should not be a surprise.This likely explains why most advisors have been moving to fee-based investment accounts. Buyers also like the consistent cash flow and income predictability.
Operating Profit
The second driver causing increased value is the operating profit of the practice. An analysis of practice efficiency and the resulting profitability, or lack thereof, is known as "enterprise value" and is included in our valuation methodology. Larger practices generally have a lower profit margin and greater weighting of enterprise value in their valuations.
% High Net Worth Clients
The third driver to increasing value is the ratio of High-Value and Affluent Clients (AUM more than $500K). Why is this important? Lower end clients (under $100K in AUM) constitute 43% of the clients of an average practice, while they produce only 7-9% of the revenue. Because the advisor's time spent with High-Value and Affluent Clients is significantly more productive, managing these client ratios (client segmentation) is highly correlated to profitability and practice value.
Practice Detractors
Number of Low Value Clients
The largest detractor from value is the number of Non-High-Value Clients in the practice – a lot is not good. A practice laden with a large number of clients often requires more staff to support the needs of the clients. In general, growing a practice through the number of clients results in lower profitability and practice value, while growing through quality (average AUM) leads to increased profitability and practice value.
Older Clients
The next biggest detractor from value is the average client age – old is not good. Just like advisors in our industry, our clients are aging as well. Older clients are taking money out of their accounts to meet their lifestyle needs. In addition, more and more are dying each year and most of their money is not staying within the practice.
Number of Professionals
The last detractor from value is the number of professionals in the practice – a lot is not good. If you have a lot of clients, you need a lot of professionals. The cost of employment is generally the largest expense a practice encounters. Licensed employees (sales reps) are generally the most expensive. One of the biggest mistakes we see is practice owners hiring additional professionals to serve the lower end of their client base.
