- On June 19, 2017
We believe unlocking the equity in your practice is as much an emotional decision as it is financial. It’s not just about getting the best price for your practice but about getting the best deal from the right advisor for your clients.
While we have more qualified buyers willing to pay a premium for a premium practice than you would be able to or want to meet, a valuation is the key factor buyers are evaluating in determining what they are willing to offer.
Here are 8 things sellers should know about valuations.
- Typically required
If your practice is going to sell for more than $350K than a valuation will likely be required by the buyer’s lender. The SBA requires a valuation for a loan more than $350K.
- Not that painful
We help you choose a valuation firm that will do it right at a fair price. There are now a lot of third party valuation firms that have sprouted up in the industry. Their quality, service and speed all vary as does their experience in advisory valuations. We know who the best options are and which ones are approved with the most popular lenders who will likely be financing your seller.
- Get your valuation for free
For the valuation banks need will typically cost from $1,000 to $1500 for most practices. While the seller initially comes out of pocket for the cost of the valuation, Advisorbox makes sure that the cost of the valuation is paid back to you at closing if we introduced the buyer and you selected a valuation firm we’re comfortable with.
- 3 kinds of valuation types
Most independent broker dealer practices and smaller RIAs utilize market-based valuations, for larger practices we see discounted cash flow based valuations, but sometimes our sellers are going to do a “need based” valuation, that is, what they need to sell for it to make sense for them to sell.
- Recurring valuation multiples from 2 to 3+
For the last 2 years the average multiple is 2.6 for recurring revenue and this multiple is expected to stay constant through 2017. In 2013 and 2014 the multiple averaged 2.3. The typical range is from a 2X to 3X plus. But this is like saying the average price per square foot of the average home in the U.S. is $100 per square foot. That might have no applicability to you. It comes down to what your individual practice dynamics are.
- Transactional valuation multiples from 0 to 1%.
Low or no multiple: If you just sold a life insurance policy or annuity that has a big commission now but doesn’t renew in ten years and may not be renewed by the client at all because you have hardly ever done that before, and likely won’t again anytime soon, then you’re not going to get a multiple on that.Higher multiple: If it is a consistent transactional product business then you’ll have a higher ratio and can be on the higher side of the range. A stock and bond trader that can show a pattern of producing X amount every single year from these clients.
- Discounted cash flow based valuations
Discounted cash flow based valuations result in larger multipliers. Smaller and mid-size RIAs typically get valued at 4X to 6X profits. RIAs with hundreds of millions in assets typically go for 5X to 7X profits and billion plus AUM RIAs from 6X to 9X profits.
- Adding value to your valuation
If you want to sell your practice for the highest premium, you can consider things like maximizing recurring revenue, seller financing more for longer, stay on for longer than a year (though not allowed if your buyer has an SBA loan), focus on increasing your net cash flow and profit, offering an earn out structure that minimizes risk to the buyer, and usually a seller can get a higher premium with more money up front selling to a different advisory owner than to one of their employees.
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