One of the most important drivers of value in any business is growth. Historical growth, while no guarantor, is a useful proxy/tool for projecting a business or asset’s ability to produce revenue in the future. As a buyer, you will pay more for a practice that is growing each year than one that is getting smaller. One of the biggest mistakes advisors/reps/agents make is waiting too long to sell their businesses, often having contemplated selling for several years before they finally made the decision. By the time many decide to actually sell the business, they have been coasting for a few years, causing their growth to stall or even decline – making it a suboptimal time to sell. For financial service practices, growth of the business can happen in three specific ways. Anyone contemplating selling their business, or a buyer looking at practices to acquire, should pay attention to the following growth metrics.
((new client assets + new assets from existing clients) – (lost client assets + existing client withdrawals)) = net flow of assets
Notice that market fluctuation is not part of the equation, which is part of the difficulty in tracking your net flow of assets. However, this is vitally important to proving your firms value to a buyer. No one can control the stock markets, but you can directly impact the net flow of assets. Tracking this will draw your focus to improving this particular piece in your business and will greatly enhance your value. It can also be a great way to quantify future potential growth that might not be immediately reflected in your revenue.
To a buyer/successor, the value of your business is driven by the revenue and profits they can potentially receive. Focusing on your growth, making adjustments to improve your short and long-term revenue projections, and tracking all of these details will greatly enhance your value. Each of these factors will drive value, but digging deeper and looking at these three components of growth will provide a buyer/seller better insights and ability to project future earning potential.