New research offers insights into the criteria that drive RIA firm valuation — and ways to maximize that valuation.
The report, from Fidelity Clearing & Custody Solutions, found that only 38% of firms have a strong grasp of what can drive firm value. The study also identifies several challenges to optimizing firm value, the top one being that many firms simply don’t make it a priority.
According to the report, the eight drivers of firm valuation are:
- Firm size
- Revenue growth and structure
- Organization (the quality of your people, or “human capital”)
- Leadership (the quality of your management team)
- Capabilities (a deep and well-rounded set of competencies that clients need)
- Client experience (a compelling organizational structure that increases value to customers and removes the client dependency on an individual advisor)
- Cost structure
- Client demographics
Maximizing Value
The report also offered four key considerations to help maximize firm value:
1. Consider a third-party valuation. If a firm owner is considering taking specific actions that are related to the value of the firm (e.g., issuing equity), the report’s authors maintain that getting a third-party valuation can provide them with meaningful insights from an outside opinion on the firm’s business value. It goes on to note that most third-party appraisers write an opinion letter that provides an independent perspective on the value drivers within a firm.
2. Invest the time to strategically manage the firm. The report says that firm owners should commit to long-range strategic planning that includes five- to 10-year goals, and that they should use KPIs to help manage the fundamentals of the business. It explains that using KPIs can help quantify a firm owner’s goals, manage the firm to these metrics, and foster a culture of accountability throughout the organization.
3. Invest in the firm’s team members, including future leaders. According to the report, that includes a commitment to developing talent and to “identify and create next-generation owners” who have the requisite skills to contribute to the growth of the firm. The report recommends that firm owners who are planning to pursue an internal succession should begin identifying and grooming next-generation owners at least five to seven years before their planned exit, and they may also want to develop equity compensation plans to retain key talent, including potential next-generation owners.
4. Position the firm to capture intergenerational wealth transfer, including engaging the adult children of existing clients, focusing their business development activities on younger generations and on younger investors.
More information about the report is available here.
NAPA 401(k) Summit Note: Check out Workshop 24: “Walk” This Way — Monetizing Your Practice
Two independent retirement-focused shops will discuss creating a transition plan, working toward monetizing your practice, along with insights from a well-recognized industry valuation/transaction firm.
Find out more — and register today at http://napasummit.org/.
