We can help you complete a deal. Where are you right now in your process?


Interested in a listing? Complete the buyer profile to be notified first when a new listing is published:


Whether you are a team of 1 or 100, SRG's open market of seller listings is at your fingertips in MyCompass.

Sign up for our free membership to complete a buyer profile and express interest in any listings you want to bid on. If you are a good fit, we will contact you to begin the deal process.

It is that simple.


About SRG

Succession Resource Group is a boutique succession consulting firm based in the Pacific Northwest, serving clients across the country. SRG was founded by David Grau Jr., MBA in 2012 after nearly a decade of helping advisors with valuation and succession planning. SRG's team of experts leverage their industry expertise, combined with best-in-class resources, to help advisors, agents, and accountants manage the equity in their businesses...

Continue Reading »

7 min read

Six Events that Require a Valuation of Your Financial Practice

Apr 25, 2023 7:00:00 AM

Most experienced business owners understand valuations as an essential tool to assist in making critical decisions for their advisory practice. Unfortunately, many advisors will invest time and effort in getting their practice appraised, only to find out that the underlying analysis is irrelevant to the specific purpose of the valuation.

Furthermore, using the wrong valuation can get even more complicated with the IRS (and other government agencies) in the picture, and can create more risk in a divorce. It’s crucial to obtain the proper valuation for your business need and ensure that it’s prepared by an accredited valuation professional who’s knowledgeable about the unique characteristics of a financial service practice.

Before we cover the various scenarios that require a valuation, it’s important to emphasize that the key to an effective valuation is to determine why you need your practice valued, what needs to be valued, and who the intended reader is. With this information, your appraiser can determine the appropriate standard of value for your analysis. A standard of value defines whose perspective of value needs to be considered and what adjustments should or should not be included in your analysis. The purpose and the standard of value aid the appraiser in determining the most appropriate valuation methods that should be applied (market, income, or asset).

events require business valuation pyramid graphic

There are several situations that require a financial services business to be appraised. Below are the six most common scenarios that cause an advisor to seek a professional business valuation.

1. Acquiring a Practice or Book of Business

To sell or buy a financial advisory practice, a valuation isn’t required. However, given that the seller’s business is most likely their most valuable asset and the size of the investment required from the buyer, it is best practice to obtain a professional, unbiased, third-party assessment of value.

For most acquisitions, a market approach using comparable transaction data will suffice. The analysis should focus on the assets being purchased, primarily the client relationships, the assets being managed or advised, and the revenues received for the services provided.

For smaller practices, typically solo practitioners generating less than $1m in gross revenue, less emphasis will be placed on their direct operating costs. This is best accomplished using a gross revenue multiple (GRM).

For practices over $1m in gross revenue but less than $5m, the valuation focus needs to shift to the earnings (SDE, EBITDA, etc.) the practice generates. Failing to account for the earnings or lack thereof, for practices this size or larger can result in a material understatement or overstatement of value.

For practices over $5m, the combination of a market approach and income approach should be used to get the most accurate measure of value.

New call-to-action

2. Applying for Business Loans

For buyers, specifically those looking to get a loan, the bank will require a valuation of the whole practice regardless of whether the borrower is acquiring the entire practice or a minority interest. The bank needs to know the value of the collateral securing the loan, which is the entire business, not the portion being acquired.

For a conventional loan, each bank will have its own requirements for underwriting. Be sure to check with your bank about these requirements. For a loan backed by the Small Business Administration (“SBA”), the SBA has specific requirements that the underwriter/bank must follow. Below is a list of the requirements by the SBA as they pertain to valuing a practice for a change of ownership:

  1. A business valuation assists the buyer in deciding that an independent qualified source supports the seller’s asking price. A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations:
    • Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;
    • Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
    • Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;
    • Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts;
    • Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers.
  2. The business valuation must be requested by and prepared for the lender. The lender may not use a business valuation prepared for the applicant or the seller. The cost of the appraisal may be passed on to the applicant.
  3. The valuation should clearly state whether the transaction is an asset purchase or a stock purchase.
  4. The business valuation must include the individual’s conclusion of value, the qualifications of the individual performing the appraisal, and their signature certifying the information contained in the appraisal.

Since the lending process can add quite a bit of time to the process of purchasing a practice or a partial interest in a practice, having a business valuation that doesn’t meet the SBA’s requirements, can add additional time and cost to the process.

3. Creating an Internal Succession Plan

The focus on valuations for a business succession plan should include both an analysis of the value of the assets in the market as well as the value of the company based on the cash flows available to a minority owner.

Before selling an interest in your business, it’s essential to “clean up” the books and remove any discretionary expenses that are consuming business cash flows when they shouldn’t be. Examples of this would include automobiles and airplane-related expenses, hangers, country club memberships, etc. Valuing a minority interest is different than valuing a controlling interest since the value needs to reflect the cash flows available to the minority owner. These discretionary expenses reduce cash flows, thus reducing the value of the shares.

4. Mergers & Teaming with Equity Sharing

For mergers and teaming, advisors serving a joint client base and sharing revenue, an equity valuation is needed to account for the value of the practice, any additional assets being contributed, and any debt being reassigned.

The goal of a teaming arrangement is to break down the barriers between practices, moving from a siloed, eat-what-you-kill model to an equity-centric model where the team is working for the business, not the individual producers.

To determine the ownership in the new equity-centric business, an equity valuation of each practice should be performed to determine the value of their individual contributions. The type of analysis will depend on the deal and the size of the practices. For most teaming engagements, a market-based valuation will suffice.

5. Divorce Involving Business Owners

The analysis necessary to accurately value the marital assets of a practice for a divorce will vary from state to state. Some states exclude the value of the assets if they were acquired or inherited before the marriage. Some states exclude personal or professional goodwill as a marital asset, which can make up a significant portion of the practice’s value.

The appraiser needs to collect a significant amount of information about the business, decide which approaches are most appropriate, and if necessary, measure and identify the portion of value attributed to personal goodwill and remove it from the valuation.

Valuing intangible assets is complex work. For a divorce or any matter being litigated or disputed, you need an accredited appraiser who knows how to value intangible assets and can clearly and effectively testify and explain their methodology and conclusions.

6. Charitable Contributions

When it comes to charitable contributions, the IRS has guidelines for what needs to be valued, when the valuation needs to be completed, and what needs to be included in the report.

The key differentiator for an IRS-related valuation, specifically for a charitable contribution, is that the appraiser is subject to severe penalties if the IRS disagrees with the appraiser’s conclusion.

Since the intended reader, the IRS, is not familiar with the practice, the industry in which the practice operates, and the marketplace for the assets of the practice, the appraiser needs to provide a sufficient level of detail in their report for the reader to gain a level of familiarity to determine if the valuation result meets their criteria.

The report needs to discuss the historical, current, and future expected performance of the economy, industry, practice, and market for the practice, as well as the economic factors that impact the industry, business, and market. In short, the report must contain a significant amount of both quantitative and qualitative detail to allow someone who is not familiar with the business to understand how the appraiser determined the Fair Market Value of the property.

It’s important to emphasize that in the event of an IRS audit, which may not happen for a couple of years after the completion of the valuation, all aspects of the appraiser’s analysis, work files, and all sources of information relied upon, must be documented and accessible. If the report complies with the standards, then there's a three-year statute of limitations for the IRS to challenge it. Of course, if it turns out that the valuation wasn’t compliant, it can be reopened. Thus, a compliant valuation is crucial when it comes to charitable contributions.

Final Tips on Business Valuations

The critical point we want to make you aware of is the importance of seeking a valuation based on the purpose or need, not convenience or, frankly, a low price. There is no “one-size-fits-all” purpose when it comes to valuing a practice. Be sure that you understand why you want or need a valuation, what needs to be valued, and who the intended reader is. Finally, choose an expert with the appropriate accreditations that is familiar with the financial services industry. Doing this may cost more upfront, but it will save you time and money in the long run.

Topics: Valuation