Linda Willis

Evaluating and valuing an RIA business requires a different set of skills required for a routine business valuation. An RIA is a people business. Founded on the trust between advisors and clients and the ability of advisors to grow, maintain and retain the trust, confidence and relationship with the client. In the case of fee-based RIAs which charge clients fees based on a percentage of assets under management, the topline revenues rise, and fall, based on uncontrollable market conditions (i.e. an unforeseen global pandemic). Because RIA valuations are tied to revenue, market conditions have a disproportionate impact on valuation. Thus, it becomes imperative that RIA owners work to control as many factors as possible of those aspects of the business which impact valuation.

Nuances of RIA valuation, which owners often do not realize until too late in the business life of the RIA, include diversification of client base and cross-generational penetration. Firms that build relationships vertically within a family to ensure continuity across generations carry greater intrinsic value and garner higher valuations and prices then those businesses with an aging client base and little to no relationship with the next generations. A diversified client base across age groups is additive to value.

Product, service offering, and pricing are impactful to the business valuation. Fee based businesses garner at a minimum 2x the value and purchase price of transactional businesses. Firms that use only their own unique asset management strategies that require the specific acumen of the founder with no next generation advisor trained and capable of replicating the strategies are less attractive to buyers and trade at lower multiples. Pricing models which are either too high or too low can also present challenges. For example, an RIA practitioner who manages custom portfolios for clients through direct stock selection charging fees that are above 150 bps will not be as attractive to a firm using third party managers and asset allocation strategies. Conversely, firms that provide a suite of services to clients (ex: financial planning, consolidated reporting and bill pay) as part of the overall investment management fee and charge sub-100 bps fees may be risking the ability to command a higher valuation number. Underpricing services usually results in shortchanging realized value upon business sale.

Ownership of the client relationships is a factor in valuation. While clients always may choose where and with whom they do business, a firm that operates as a united firm under one name with shared clients and non-solicitation agreements in place with all firm employees garner higher valuations. This also speaks to firm structure which includes compensation models and uniformity across the firm. RIA’s in which owners have a salary and/or a compensation formula which is consistent with the other firm members so that the business is run like a business inclusive of a Profit & Loss Statement and tracking as well as retained earnings for business growth receive higher valuations.

While not profound, controlling costs is definitely within the power of the RIA owner/leadership and should be a focus. Overhead within the business inclusive of space, staffing, technology, marketing and compensation are important. Staffing ratios – too many or not enough – are relevant. While trimming expenses from a business is a way for buyers to get immediate lift, if a seller seeks to position his or her entire firm including employees for retention by an acquirer, being vigilant about spend and allocation of cash flow resources will be key.

Ultimately, predictable, recurring cash flow is what underpins valuation in an RIA business. Clients, products/services, expenses, and fees all directly impact the quality of the cash flows and should be the focus of RIA owners seeking to optimize their value.