Growth is King
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.
- Revenue Growth – The most commonly analyzed growth rate is annual revenue, year-over-year. Revenue is what a buyer will use to pay for the business. The year-over-year revenue growth for at least the last three years is most commonly used, but you should have a comprehensive view of historical performance, looking back over as long as five or six years, but also shorter-term looking at the last month/quarter. Practices receiving the highest value ratios demonstrate consistent growth AND diversified sources of growth.
- Client Growth – It is very important for every firm to track client growth. The most valuable firms in the industry track exactly what source (existing clients, attorney/CPA referrals, networking events, etc.) each new client comes from and the reason for any lost clients. This allows owners to identify issues or strengths in their firm, independent of the impact on revenue. This also allows a buyer to review the source of the growth and determine whether it is repeatable after a sale. If you can consistently show net client growth (more clients added than lost), coupled with revenue growth, then you can reasonably expect that the revenue will continue to increase.
- Asset Growth – Asset growth is a critical element to understanding the overall growth of an advisory business specifically and is one of the least tracked elements in the industry. For an advisory business, revenue is a function of what is produced off of the assets under management of a firm, and client growth can be misleading as not all clients are equal in size/value. Thus, we pay attention to the net flow of assets using the following equation:
((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.