How Independent Advisors Receive 8-12x Valuations

The wealth management landscape is undergoing a thrilling metamorphosis, with financial advisors seizing the opportunity to break free from the chains of big firms and venture into independence. Picture this: a seismic shift in the industry, akin to the aftermath of JPMorgan Chase’s acquisition of First Republic Bank, has advisors itching to liberate themselves from the stifling dictates of corporate overlords. It’s a daring escape, driven by a longing for autonomy and a savvy eye on the skyrocketing valuations in the wake of the industry upheaval.

Let’s unlock the secrets behind these mesmerizing valuations that have buyers salivating. First and foremost, buyers are seeking steady income streams. They want to know the free cash flow or future expected earnings that the practice can churn out like a well-oiled money machine. Add to that the crucial element of client retention – the probability of keeping loyal clients and the bulk of Assets Under Management (AUM) intact during the transition. The stakes are high, and advisors need to prove they can bring their clients along for the wild ride.

But it doesn’t end there. The structure of fees versus commissions is a pivotal factor, with 86% of deals clinched because advisors have embraced the fee-based practice model. And what’s the sweet spot for location? Think affluent markets or the allure of retirement havens.

Now, how can advisors master the enigmatic art of valuing their businesses? These triumphant tales of financial success are weaved by masterful advisors, artfully combining organic and inorganic growth, supported by compelling data to lure bullish buyers. Take Robertson Stephens, for instance – they shunned tempting offers from Rockefeller Capital, dreaming of building something even grander and more noble, a staggering $10 billion empire!

As an advisor, the question arises – how can I maximize my business valuation? The answer lies in a magical trinity: exceptional client service, cunning recruitment, and strategic growth initiatives. But what about those stuck in the labyrinth of traditional brokerage firms? Fear not, for independence holds the key to unlocking the true potential of your practice.

Here’s a chart that identifies what buyers are looking for when evaluation an advisory practice:

Consider this scenario – an advisor looking to retire at a firm with a $5 million book of business at a wirehouse firm could expect a payout ranging from $5 million to $13.75 million, depending on the firm’s transition program. Now, let’s fast-forward five years with zero growth and conservatively expect $3 million in earnings. Suddenly, the valuation skyrockets to a jaw-dropping $27 million! But that’s just the beginning.

What if the same $5 million team grew at a 10% Compound Annual Growth Rate (CAGR) over five years, doubling its earnings? Add a conservative multiple of 11x EBIDA, and we’re talking about nearly doubling the business’s value! But we’re not done yet – let’s throw in a curveball. Apply that same 10% CAGR over five years, and also acquire a $2 million practice in year five. The impact of scale on the enterprise value is truly astonishing! With a conservative multiple of 12x, the business would be worth a mind-boggling $54 million or more!

TGG

As the Editor of The Gershman Group, a boutique financial services consulting firm, TGG brings expertise in financial analysis, strategic planning, and market research. With a keen eye for detail and a passion for helping businesses navigate complex financial landscapes, TGG delivers insightful, high-quality content to empower informed decisions. Backed by years of industry experience, TGG makes complex topics accessible through clear and compelling communication, shaping the firm’s thought leadership and commitment to excellence in financial services.