7 Things That Drive Practice Value
Advisors often believe being a high producer and continuing to drive revenue makes their practice worth more money. Fundamentally, this thinking makes sense, but in reality, purchasers will pay a premium for much more than revenue. As you work toward realizing maximum value for your practice, keep in mind:
Purchasers are looking for a practice that fits their value proposition. Purchasing one that aligns with their existing practice – in client experience, depth of relationships, type of business they do – enables the purchaser to more quickly merge the new practice into theirs and realize return on investment.
2. Growth potential
Not all practices have value because they have recurring revenue. Some practices – brokerage and heavy annuity-driven practices, for instance – have not realized their full earnings potential, yet purchasers are willing to pay more than the typical multiple because they can drive more profitability through financial planning and advisory relationships.
3. Recurring earnings
Everyone in the advisory world wants a 100% recurring revenue practice, and they’ll pay a lot for it. Who wouldn’t want a practice that pays from day one without changing or doing anything?
4. Turn-key operations
A practice that has redundant and reliable operational systems is worth its weight in gold. One selling point is the owner doesn’t have to be involved day to day for the practice to serve clients and generate revenue. The less an owner is needed the more their practice is worth to a purchaser.
The law of large numbers suggests that a practice located close to larger populations is more desirable. However, don’t despair if you aren’t close to a large population center. Practices in rural locations allow advisors to more easily build brands of prominence because individuality is more easily recognized and competition is less fierce. Advisors who have the ability to separate themselves from their competition can build great value in rural markets. You can also drive value in rural areas by acclimating clients to technology — WebEx, FaceTime, conference calls – for remote service, eliminating the need for clients or the advisor to travel for appointments.
At the end of the day, a business needs to generate revenue to fund retirement, lifestyle, future growth of the practice, etc. The buyer determines their return on investment based on expected profit.
7. Demographic of the book
Purchasers are interested in books with more than 50% of the revenue produced by clients under age 70. Typically, the heaviest revenue flow comes from clients age 61-70. Creating solid revenue streams in the 51-60 and 41-50 demographic can indicate future income. Conversely, a high percentage of revenue from age 70+ clients can bring down multiples drastically.
Prepping your practice for future sale may seem like a heavy lift. But if you think like a buyer, not a seller, and focus on strength in these areas, your practice will be ready to sell when you are.
REALIZE MAXIMUM VALUE FOR YOUR PRACTICE.
Learn how your business could benefit from Waddell & Reed’s Great Practice Solutions practice development program.
Tate Kerst is VP – External Practice Development at Waddell & Reed. The External Practice Development team works with financial advisors as part of the Great Practice Solutions practice development program to help them grow and strengthen their practices, providing deep generalist expertise, specialized areas of focus, and broad-based awareness of industry best practices.