5 Factors That Impact the Value of Your Financial Advisory Firm

Putting a price tag on your financial advisory firm is a complicated process. The dollar value you personally place on your own practice usually won’t match the figure a prospective buyer will want to pay for it. After all, you’ve invested endless energy and countless hours into building something great. It’s what you’ve poured your heart and soul into for years upon years.

But reality is, an interested buyer will want to see verifiable information based on concrete evidence and facts. As you work to determine the value of your financial advisory practice, you must consider the various components prospective buyers look for in a firm. You have to separate your subjective value from the objective value of your firm.

What are those factors that impact the value of a financial advisory practice? Let’s discuss five aspects that contribute to the overall worth of a firm.

1. Client Base

Clients equal revenue. A financial advisory is worth nothing without its clientele. A client base is how a company makes money, so a smart buyer will ask to learn about your current clientele as a way to gauge your worth.

  • Client Demographics: Clients come in all shapes and sizes – younger, older, lower net worth, and higher net worth. There is no right or wrong type of client demographic. Different strokes for different folks. A financial advisor can be highly successful servicing 50 high-net-worth clients or 150 less-wealthy clients. To each their own, but what is important is how those clients feel about you as their financial advisor.
  • Client Relationships: The worth of a loyal, devoted client will always outweigh a dissatisfied, upset client. Buyers want to see that your client relationships are thriving, that you have perfected your art, that you know what you are doing and your clients are reaping the benefits of your expertise.
  • Client Retention: Client relationships affect client retention. Happy clients are stable clients. Strong client relationships equate to predictable and steady earnings. High-end accounts don’t mean much if they don’t stick around.
  • Client Growth: For a business to remain profitable year after year, it needs both current and future clients. As a buyer evaluates your client base, they will take into consideration how well you capture the next generation of clients. What does your reputation say about you? Are word-of-mouth referrals coming your way? Is there potential for growth?

2. Revenue

While a client base can say a lot about your revenue, an interested buyer will want to review exact financial figures. Get ready to reveal both past and present financial reports. Then be prepared for those potential prospects to scrutinize every detail of the reports.

Have you grown quarter after quarter? Were your earnings stagnant during certain periods of time? Are your profits primarily connected to a few large accounts or spread out between numerous revenue streams? The small details create the big picture for buyers.

3. Expenses

Revenue can only take a business so far if there is excessive debt, liabilities, or other financial obligations. An accurate valuation will always take into account a firm’s expenses.

We’ve all heard the saying, “With great risk comes great reward.” Well, not in this scenario. Risks don’t work in your favor when trying to prove your firm’s worth.

Buyers will look for red flags, and most buyers won’t want to fork out a large amount of money to take on a sinking ship. Although it goes without saying, having all your ducks in a row gives you the best chance at receiving the highest valuation possible.

4. Organization

Red flags come in a variety of forms. Lack of organization is another big turnoff to potential buyers. Annual profits are not as appealing amidst a chaotic mess.

For example, let’s say you have several employees. Are they carrying out their job duties? Do they have the proper training and education to perform those responsibilities? Are they supported in their work goals? How is the office atmosphere? Do you operate as a team?

Or maybe you are the sole proprietor of your business. Is your practice equipped with the proper technological tools in order for you to best help your clients? Do you have up-to-date computers, apps, and software tools? Is your website functional? Do you utilize social media? Do you take advantage of email marketing and video platforms?

In other words, a business in tip-top shape is well worth the price to buyers. The value of your firm encompasses all elements of your business, and buyers want to purchase a well-oiled machine.

5. Location

Location plays a huge role in calculating the value of a practice. A small practice located in Kentucky will not carry the same price tag as a large business based in New York City. Plus, location impacts a firm’s target market, visibility, overhead expenses, management costs, legal requirements, and much more. Even the presence of nearby competitors (or lack thereof) could make a difference on your valuation.

Need Help Determining Your Value?

Are you having a hard time placing a value on your financial advisory firm? Consider working with a business coach for financial planners.

Hiring an outside perspective to help you view your firm through an objective lens can be one the best ways to improve your business model, and in turn, increase your value. A coach can also help you learn how to market yourself and how to network as a financial advisor.

And as you work to determine the price tag of your practice, keep in mind how your client base, revenue, expenses, organization, and location can impact your value.