Valuation Best Practices: Stop Leaving Money on the Table

Ryan Grau: Good afternoon. Thank you, everybody, for taking time to join us today. Looks like we still have quite a few people joining, so we’ll give everybody a second here to get settled.

Today we’re going to be talking about valuation best practices, and talking to you about understanding some of the key drivers behind your values, some important factors that you need to know about getting ready to have your practice valued, and also interpreting and understanding the outcomes. All with an emphasis on hopefully helping you to stop leaving money on the table when it is time to consider a transaction.

So it looks like we’ve got most people here. Numbers have stopped climbing. We’re going to be launching a poll for you here in just a moment. If you wouldn’t mind answering those questions, we would greatly appreciate it. While you’re doing that, I will be the voice in the background talking to you about Succession Resource Group for those of you who are not familiar with us.

Succession Resource Group is a one-stop consulting firm, meaning that we don’t have just a laser focus on one discipline. Rather, we have a team of 23 professionals with diverse backgrounds in various areas of expertise. Your presenters today, David and me, Ryan, have slightly different backgrounds. David really focuses more on sell-side M&A consulting, and really everything that you see here in terms of services, because he founded the company in 2012. So David has a very deep understanding of all of these topics. My area of expertise specifically is valuation and benchmarking. That is what my team focuses on, which is why I’m going to be leading today’s presentation with David.

In addition to valuation, Succession Resource Group focuses on other services such as succession planning, exit planning, continuity planning, merging practices together, entity formation, restructuring entities if you’re wanting to switch to a two-tier entity system, employment agreements, and compensation design. So again, we do a lot of things for our clients. All of these things generally have one thing in common, which is transacting on the value of your practice, or maintaining, improving, and protecting the value of your practice. So that’s going to be the key part of what we’re going to be focusing on today.

David, hopefully I represented SRG well. Anything that you’d want to add?

David Grau Jr.: You said it nicer. I know a little about a lot, and you know a lot about a little, which is the nice part about having a full team here, to Ryan’s point. And if and when we get the chance to work together, or, I recognize some of the names on the registration list here, get a chance to work together again, it’s likely because, to Ryan’s point, we just keep everything under one roof.

It’s nice to get some expertise in consulting, which we’ve got in spades with, I would say, not one of the most experienced, probably the most experienced team of consultants in the industry when you look at it by tenure. But also just the alphabet soup down there in the bottom left on the accreditations, right? That gives us the ability to not only talk strategy, understand the industry, and go deep on that, but then we don’t have any external handoffs. We can keep the tax side in-house, the legal side in-house.

We would never sell based on being a lower-cost solution. But I will say, because we can control the process end to end, like Ryan said, it gives us the ability to actually deliver things more cost effectively, because you just have less stuff getting dropped and you’ve got fewer handoffs. But no, otherwise, you nailed it. We’ve got a team of really smart people here, one of whom is going to lead the conversation today. And hopefully you all have some questions, because with two of us, we get to moderate and make sure we get your questions answered.

Ryan Grau: Perfect. So let’s talk about our agenda and what we are hoping you’ll take away from today’s presentation, because we are going to be hammering these topics home today.

First and foremost, your practice has more than one value. I know, mind-blowing for a lot of people. But unlike a house or a car, the valuation of your practice is going to follow cash flows, and those cash flows will be determined by the purpose of your valuation and who you’re selling to.

Second, there are a lot of key performance indicators that will have an impact on your value. Some of them are more important than others. Some of them are informational. Some are very macro valuation movers, some are micro. So we’ll talk about those different valuation key performance indicators and put them in perspective.

Next, headline valuation multiples are not price. Often people read industry publications about what practices are selling for. They talk to a friend at the bar about what their friend sold their practice for, and this now becomes what my practice would sell for. Well, we need to peel back those multiples and understand what went into that transaction, because price is very easily influenced by deal terms. So a 20 times or 15 times EBITDA multiple is not a cash price. It’s not what you’re going to sell to a key employee for.

Next, of the KPIs, there is some pretty low-hanging fruit for a vast majority of practices in this industry that you should be focusing on. A lot of these KPIs take time and tactical decisions, but very little investment. Some of them take a little bit of investment to get them buttoned up, and that can unlock tens, if not hundreds of thousands of dollars in risk mitigation in your practice.

And lastly, waiting to have your valuation done until you get to a point that you are considering a transaction, or getting ready to make a decision, leaves you with the least amount of options. So those are going to be our five key takeaways. Go ahead, Dave.

David Grau Jr.: And to your point, I don’t care what benchmark you use, how early you start the process. Your business is probably one of your most valuable assets. And thank you, Tim, for keeping us honest on industry jargon: the key performance indicators, the KPIs. Some of them you don’t have a ton of control over, but most of them you do.

So Ryan and I thought, as we were putting this deck together, let’s start by just setting the table before we get too far into pulling on these levers of how you impact your value positively or negatively. Let’s set the stage with where we are right now, average multiples, somehow already in Q4 of 2026.

So I’ll put up here for you on this slide the simple number to start with, and that is the average recurring revenue multiple industry-wide for an RIA. We’re looking at 3.27 times top-line revenue. Now, this is a useful and useless number all at the same time. It’s the nature of the beast with averages. It’s like knowing the price per square foot of real estate in the U.S. Interesting. I can do something with it. I can benchmark my home’s value against it. So it’s worth knowing, but I would never buy or sell my home based on it, and these multiples are the same way. It’s just a tool, directionally. When you get your valuation back from us and you see that your value is $10 million, which works out to a 3.75 multiple, you now know, A, that’s good anyway, but B, it’s better than average, and so you can start to understand how or why.

So this is an average multiple. It’s useful when you’re trying to benchmark a book of business. A million dollars, a million and a half in revenue and less, top-line revenue multiples work great. They’re fine, because people aren’t nearly as concerned about your overhead. They still care, but they’re not as concerned as when buying a $10 million or a $20 million book of business. That’s a legitimate business at that size, where the revenue is still interesting, but I’m actually buying earnings and profits, because at $10 million plus I certainly need to keep the people and the processes. Everything needs to mostly stay intact.

So you’ve got revenue multiples that you’ll see talking heads out there like us talking about, and they’re fine. They’re right in the right application. And you’ve got other talking heads, investment bankers, for example, that will swear by earnings multiples. And they’re also right. It is a useful tool in the right context, but it really just depends on the size of the book.

So when we talk about these multiples, because we’re going to talk about them in a variety of different contexts here today, I want to start by sharing what the average multiples are, and I want to give you the range, because there’s a pretty broad range. Down here you’ll see the earnings multiple anywhere between 6 and 14. We’ve seen as high as 15 sometimes. But the average lands right about, let’s call it 10, and round it off for the sake of today’s conversation. If you look at the recurring multiple at 3.27, that exists within just as broad a range, anywhere between two and, let’s call it, four and a half times.

So if you had a million dollars in fee revenue, I just told you you’re worth somewhere between $2 and $4.5 million. That’s so broad as to be almost useless. But it’s the nature of the beast with averages. It’s worth knowing, but you’ve got to put it in context.

I’m going to grossly oversimplify it to start with, and then Ryan and I collectively will peel the proverbial onion back. If you look at these multiples, to your left you have the fixer-uppers. They’re still good practices, but they were better practices 5 or 10 years ago. They’re just not in growth mode. They’re not bringing young talent in and training and mentoring them. They’re kind of retired in place. And so, no, they don’t get the best values. They still get a good value by historical standards, but they’re not going to set any records.

And then you’ve got the practices to the right that are very much like they’ve listened to this presentation. This will be one of many that they attend this year. They’re actively valuing their business every single year. They’re tracking their key performance indicators, they’re making adjustments, and every year they come back, and Ryan has the pleasure of doing those debrief calls and telling them, “Hey, your revenue went up by 12%, your value went up by 15. Things are trending in the right direction.” But we’ve got to be tracking it to be able to start making those kinds of informed decisions.

So I gave you the revenue multiples, I gave you the earnings multiples. I also want to put these two things in context, because 3.27 times top-line revenue or 9.98 times earnings is not a different answer. Those are average multiples. If I apply them to an average business, in this case a $2 million practice with a typical overhead cost structure, three times top line is $6 million, and 10 times earnings is also $6 million. No difference.

Now, the cool thing that we’re going to talk more about today is that as your practice grows into a business, there are things down here on the earnings side that you have a lot of control over. I’m going to start with an example here at 40% overhead, not including owner’s comp. So if I have 40% overhead, and over the course of a couple of years I can drop that down to maybe even just 35%, with smart, strategic cuts or by getting rid of owner discretionary stuff, I can drive that value up at the same multiple by, in my example, a million dollars. There are a lot of things that you get a lot of control over if you start the process early enough. That’s the focus of today’s presentation. If you start early, you have a lot of options, you have a lot of levers, and that will lead to a smoother exit and more value for you. It ends up being a win-win across the board.

For better or worse, many of the clients we have the pleasure of working with call us when they have an offer in hand or they’ve started to have those conversations. And as a result, if you’re in the throes of starting to sell your business, we can still give you an amazing valuation. It’s going to be really useful. The problem is, it’s 40 pages and you’re only going to care about one half of one page that has the number, because there’s just nothing you can do.

Start five years out. We can identify some real key drivers to focus on: the team mix, the client base, the revenue. Start making adjustments. We come back and value it again. We’re three years out. We start making some very intentional adjustments that are very doable over even just four or five years. And all of a sudden, when we finally get to the point of having an offer in hand, you are clearly going to be the smartest person in the room, at least when it comes to the value of your business. You’re going to be able to sit down at that table, literal or proverbial, spread your valuations out, and show them how every one of your key performance indicators has gotten better every single year and the value is trending up. I would not want to negotiate with that seller. So it’s a really nice position to be in.

The trouble is, when you talk about the time frame and the levers, it is a little bit more involved than that. Here, I’m just talking about preparing for the eventual sale. When it comes time to do the valuation, we really do need to understand what exactly it is you’re doing the valuation for, because there isn’t just one simple answer, right, Ryan?

Ryan Grau: Correct. So purpose is going to be the starting place for any valuation. Not methodology, not multiples or which multiples to apply. It’s purpose. What do you need the valuation for? What is the driving force that is causing you to have your practice valued? That’s where we need to start. The reason is that it determines what we’re going to be analyzing, what needs to be in the report, and who the report needs to be catered to.

So there are categorically two areas that valuations are going to fall into. Either binding decisions are going to be made off of them, meaning your valuation is authoritative in that scenario, or it’s going to be informational and help you make decisions.

Valuations become binding anytime we’re entering a courtroom or mediation or arbitration: we’re going to trial, a divorce, a breach of contract. Absolutely, the valuation is going to be a matter of fact. Now, there are certain types of analyses that need to go into a valuation, like for a divorce. There are over 30 states that don’t include personal goodwill as a marital asset.

When you talk to advisors going through a divorce, most of the time they’ll tell you, “Oh, this is 100% personal goodwill. You couldn’t replace me,” even though they have a continuity plan with somebody that, in the event they die, will take over their client base, and if that doesn’t happen, the broker-dealer will make sure those clients are serviced. “But you couldn’t replace me. There’s no value.”

Anyway, the point being, when we do a valuation for a divorce, we’re going to look at what practices will sell for in the market, but then the jurisdiction that the divorce is taking place in will tell us what level of cash flows need to be considered in that valuation. Then a trier of fact will determine whether they agree with that value, what they’re going to do with it, and what the value of that asset will be.

Again, authoritative: lending. You’re looking to take out a loan to acquire an interest or acquire a practice. Well, the underwriting team needs to know what the fair market value of that asset is. And often for a minority interest, we don’t just value a minority share. They want to know what the full collateral is, because in most instances the company is going to be offering a guarantee on that loan. So we need to value the whole company so the underwriters can make the decision.

And then lastly, on the binding side of things, is estate and gift tax. Anytime we are talking about trusts or estate planning, whether it’s now or in the future, you need an IRS-level qualified valuation. The IRS has very specific guidelines about how to value a practice. They don’t care if it’s a law firm, a donut shop, or an advisory practice. They have very specific guidelines about what goes into their valuation and the timing of their valuations. And when it comes to charitable contributions, there are even more stringent rules around the valuation. So if you are considering a charitable contribution, please reach out and talk to us or talk to your CPA. They’ll be familiar with those guidelines and timelines, because again, they’re very tight.

On the decision-making side of things: exit planning, looking to merge your practice. In some of these scenarios, again, it is informative. It’s not necessarily authoritative, but it is also good CYA to have in case something does happen.

For example, if we’re merging practices together and we set up a new company, there are capital contributions happening. As long as those capital contributions are happening at or around fair market value, or there is reason, rationale, and justification for what is being contributed and what the resulting ownerships are, it shouldn’t be an issue. However, if only one person is contributing assets and the other is contributing nothing, and all of a sudden we come out the other side at 50/50, well, the IRS may take issue with that. So again, making well-informed decisions is what we’re looking at on this side of the slide.

Another one is continuity planning. While it isn’t binding, understand that when we put together a shareholders agreement, an LLC members agreement, or just a simple buy-sell or cross-purchase agreement, the agreed-upon value language in that document is binding, because the entire nature of that document is to decide what happens with the practice and how it will be valued in the event that you’re not able to sit at the table and negotiate. So that applies in those scenarios for death and disability planning.

Even succession planning, because if we end up discounting shares too much in an internal succession plan, that can be considered compensation. Again, that can set off a red flag at the IRS. So the key here is, while these aren’t binding, they are protections for you. Whatever you decide to transact at, the valuation isn’t what you have to transact at, but it is informative, and it will set the boundaries and guardrails for you to make those informed decisions. Anything that you want to add to that, Dave?

David Grau Jr.: No, just to your point regarding purpose. I know you said it a little tongue-in-cheek at the beginning, the idea of having more than one value. That seems a little mind-blowing to some folks. It is a weird concept, because you think, “My business has a value. I may not know what it is, but I would hire somebody like you, Ryan, to tell me what it is.” And the trouble is you answer my question with a question: “Well, under what circumstances? Who are you selling to? What’s the purpose?” Those things have a really material impact.

Ryan Grau: Yep. So purpose is important because, again, it tells us what level of analysis is needed and what the cash flows are going to look like post-transaction. And again, value follows cash flows. So once we’ve determined purpose, the very next thing is an understanding of who the buyer is. Buyers are going to be the very next important thing in terms of understanding impacts on value and cash flows.

David Grau Jr.: Right. Oops, sorry, wrong way. There we go. To your point, it’s back to the purpose. Well, who’s my hypothetical buyer? Let’s just go from left to right with real simple examples here: an internal sale versus maybe selling to a peer.

The internal sale is going to assume, not even technically yet, just practically, that I’m selling part of the business to my internal team. They’re buying into a going concern. The business is going to look strikingly similar the day after they bought in to the day before they bought in. So there are no synergies, there’s no synergistic effect, we’re not cutting overhead. We’ve got to try to do more with our profits now than we did before. So an internal sale is probably going to be on the lower end. You can see the range down here.

Peer sale: well, I’m buying your business and you’re right down the street from me. We don’t need two offices. I definitely don’t need two people fighting over answering the phone, so we’ll go down to one receptionist. We both have an investment manager. We don’t need two of those. So in a peer sale, or even the aggregator sale, you start to see some synergies. Things change. My assumptions as a buyer have an impact on the perceived value.

So, a first cut at this, so that you can do something with it, versus just look at it and think, “Huh, interesting, how smart they are.” The actionable item here is that, first, it’s going to come down to the size of your firm. Again, I’ve seen some of the questions in the Q&A, and I appreciate all of you being active so we can answer your questions and not just talk at you for 45 minutes.

The first question is size. If you’re running a million-dollar book of business, and it’s you and your spouse working part-time out of your home office, fantastic, enjoy it. An internal sale is probably not on the table at that size, any more than a private equity-backed aggregator sale is, even if you’ve gotten emails or letters in the mail. These are off the table as serious contenders. It’s going to be a peer sale.

But let’s say you’ve gotten bigger and it’s no longer a lifestyle business. You’ve got $10 million in revenue. Okay, well, then in theory, all of these are on the table. But then it comes down to size and your timeline. If you’ve got $10 million in revenue, but you want to sell the business and be done next year because of a health issue, internal is off the table and private equity is off the table, because those are really more recruiting deals where you have to stay around and work for four or five years. Not a bad thing, but if you need to be done in 12 to 18 months, this is not going to work. So you’re back to the peer sale.

So the size, your timeline, and the fact pattern ultimately lead you to choose one. Or, if you start early enough and the stars align, you may actually have all three of these as options. And I’ll tell you, if that’s the case, focus on the internal sale. Build it as plan A. Because I promise that as you get bigger, if plan A doesn’t work, you will get more value from your peers or the aggregators by virtue of having trained a turnkey team and built the systems and processes. Your runner-up consolation prize might be bigger and better than the internal sale itself, from a purely financial perspective.

So that’s all I’ll say there. We want to try to make sure that you have the ability to make these informed choices. And you know what? If, based on the circumstances, the size, and your time frame, you’re left with one of these, fine. But I’d rather you at least be able to pursue it and not waste your time trying to figure out whether maybe the PE deal is viable with your $1.5 million in revenue. It’s not. They’re going to tell you that it’s interesting and that they are interested. But until you get to a couple hundred million in assets under management, the terms just won’t even be comparable to what you can get from your peers. That’s the better fit.

So different buyers equal different cash flows. This is one of the components that impacts the value. Ryan, as we start to peel the onion back on these multiples, I said on the last slide, different buyers, different values. I think you’re sort of reinforcing it here. Is that fair?

Ryan Grau: Fair. And I want to address some of the questions that popped up in the Q&A on your last slide. With an internal sale, what we are talking about here specifically is a sale to a key employee or a sale to a partner, whereas a peer sale is selling a controlling interest to somebody who is not affiliated with our practice. We could be in the same office, but they have nothing to do with my client base. We’re changing clients, signing them over to another rep code, transitioning them over to another practice. So that’s going to be the key differentiator.

Now, where the lines can get blurred is if we’re selling a controlling interest to a key employee rather than creating a multi-tranche succession plan. This is where we go to the principle of alternatives, understanding that the key employee, the younger financial advisor who’s going to be buying the practice from you, isn’t bringing any synergies to the table. So understand that from their perspective, it may not make sense from a cash flow perspective to pay an 8 to 10 times EBITDA multiple for your practice.

So why is an internal sale generally valued lower than a peer sale? It’s not that your practice is worthless. It has nothing to do with the headaches. It has to do with cash flows. In an internal sale, there are no synergies being created. It is your opportunities for growth, your client base, and we’ll get into those key performance indicators, but it is your cash flows.

In a peer sale, if we have a broker-dealer affiliation, we’re generally going to be selling to somebody that’s one and a half to two times the size, and as a result, they may get an increase in their grid payout. Synergistic effect. The two practices each have standalone costs for running the practice, and when they come together, those aren’t transferring over. Synergistic effect. So in a peer sale, the reason buyers are willing to pay more is, one, there are synergies, and two, it’s a competitive bidding environment. If they don’t, the other 70 buyers behind them will. So that’s going to be the key differentiator between an internal sale and a peer sale.

Now, when we distill valuation down, there are really two key factors here. It’s earnings, and the confidence that the buyer is going to have in those earnings continuing moving forward. So basically, we have a benefit stream, revenue or earnings, and we have a multiple. That’s how we’re going to come up with value.

So, tying this to the internal, peer, and PE-backed aggregator buyers. In an internal sale, we are going to be looking at your cash flows. No synergies. Yes, we will make normalizing adjustments. If you have your Range Rover or your Porsche on your balance sheet, or you have personal expenses on your profit and loss statement, those are going to get normalized. If you have a recruiting expense, a technology fee, or some one-time cost that isn’t going to recur, that’s going to get adjusted. So earnings are going to be normalized.

Now, again, focusing on an internal sale, the confidence the buyer is going to have: yes, they are going to have confidence, because we aren’t changing anything in the practice. As a result, we’re generally going to have less concern around attrition of clients, because they’re going to stay within that practice. But again, we don’t have the synergies, we don’t have the cash flows. So it’s not fair to use market multiples observed from peer-to-peer transactions in an internal sale, because in most cases it’s not going to make sense from a cash flow perspective. If you’re putting a deal together, and you’re either a G1 or a G2 successor, and you’re talking about 14- or 15-year financing on the deal, you missed the mark on value, period. End of story.

When it comes to a peer-to-peer sale, again, those earnings change because synergies are now entering the equation. So from the buyer’s perspective, I’m going to have a higher perception of value, because I’m going to have more cash flows available to me than you or anybody internally at your practice would have.

Then, from that buyer’s perspective, what is my confidence in that revenue continuing? This is when we start getting into recurring versus non-recurring revenue. The more recurring revenue we have, the more it’s repeatable, predictable, and reliable, and the more confidence I’m going to have that it’s going to continue. If we have a commission-based practice where you’re out putting on seminars and selling annuities, and we’re wrapping these up with surrender periods, well, you can talk to me until you’re blue in the face about all the wonderful opportunities that could be extracted from your practice. But if you haven’t been able to demonstrate those opportunities, I don’t care. Buyers aren’t going to care. So again, it’s the confidence in that revenue stream.

And then lastly, with the PE-backed aggregators: what does it earn? Well, PE-backed aggregators, for the most part, aren’t looking to create retirement strategies for this industry. They’re looking to partner. They’re looking for people who want growth solutions, because they hold the rocket boosters. So you want to join their platform? Well, they have a system and process for onboarding you and your team onto the platform. If you are going to be retiring and sunsetting, great, we can address that. But we’re looking for a turnkey practice. We’re not looking to solve problems for you. So we move you onto our platform. We know what success looks like, so we’re going to price that into acquiring your practice, because we know what firms on our platform have been able to do. We have high confidence, and therefore we’re going to pay more in that scenario.

So, Dave, anything else that you’d want to add to these?

David Grau Jr.: Sorry, I was on mute. There was a question that came in on why internal sales are so much lower. When you factor in the risk, they’re not really that much lower. If I go back a slide here, there we go. Look at the deal terms underlying these. That’s another part of where you can get sideways with this stuff real quick.

Internal sale: if I buy 10% of Ryan’s business, because I’m his amazing junior staff person (to be clear, I know I look younger, I’m not; he’s younger than I am), I’m buying in. I’m going to go borrow the money, take a bank loan out, and give him a duffel bag full of cash, or a check at closing. So there’s no risk in that scenario for him. He deposits the check, and then in another year or two, I buy more equity.

Flip the script over here and say, “Well, I would much rather have the private equity deal that yields 9 to 15 times,” probably 9 to 12 on a more consistent basis. That’s still a lot higher number. Yeah, but the terms. I’m not going to get a duffel bag full of cash or a check at closing. I’m going to get maybe 40%, 50% on the high end. The remaining portion is going to be in an earnout and rolled equity that may or may not ever be liquid. Who knows? And I’ve got to stay and I have to work it. To get the earnout, I have to be there for the next four to five years and hit, generally, 10% to 20% growth. So there are just a lot of strings attached.

So can you get a higher value over here? Yeah, you bet. But it’s, A, a different buyer, and B, a very different set of deal terms. So it’s definitely worth unpacking some of these different levers, because, again, you won’t necessarily have control over the deal terms, but you kind of do by virtue of the buyer that you pick.

The other thing I’ll hit on here is the four mistakes that undermine your valuation effort, whether you do it once or every single year with us.

Number one, Ryan already hit it, but I’ll say it again, and that is asking the wrong question, or not delivering the right set of assumptions. If I’m selling to my internal team and they’re going to take over, I don’t want Ryan’s opinion of the fair market value of this business if I sold it to an industry aggregator. That would be super interesting academically, but it’s a totally different set of assumptions. So we definitely need to make sure we’re asking the right question.

We need good inputs. Now, that sounds obvious. But there’s that old saying, garbage in, garbage out. We really do need good data. It needs to be clean. We need to get the owner discretionary stuff out. If it’s on your books and records, don’t make the buyer do that. Let’s get that done ahead of time, so you get the most value for your business.

There’s a question that came in on reasonable owner’s compensation. That’s another one of those things where if you come to us and say, “Oh, I pay myself $750,000,” well, that’s probably not reasonable owner’s compensation for the work that you do. So there’s just a lot of normalization, a lot of work that goes into getting good data. And I promise you, if you value your business every year, even if your metrics or KPIs don’t go up every year, even if your business next year looks exactly the same as it does today, your value is probably still going to go up, because your ability to give us better data, a deeper level of data, is just going to be different. So wrong inputs are definitely one of those things that can undermine your efforts.

You’ll see we put a few examples here. Even something as simple as growth: if you tell Ryan and the valuation team that you’re growing at 10% per year, but you can’t tell us where that growth comes from, is it from the markets? Is it from referrals, new clients, your radio show or seminar series? That stuff matters.

And then the wrong benchmark is another one. This is probably more about expectations than anything else. You can see the subtext here: a rule of thumb or a peer’s headline multiple. The example I’ll give here: there was a great firm, I think it was mostly RIA, but they did have a broker-dealer affiliation with a big national BD. So, a hybrid firm. $10 million a year in gross revenue, mostly fees. I’ll say it again: $10 million in fees per year. Good firm, hybrid. The valuation came back at about $10 million.

And I can tell you that John, one of the owners of that firm, had not done that math in his head. He had the wrong benchmarks. He was doing a valuation based on simple rules of thumb on top-line revenue. Had he used a more reasonable earnings multiple, which is the problem in that practice. Not a problem necessarily; they’re reinvesting heavily in the business. On $10 million in revenue, they had less than a million in earnings. And 10 times a million is still only $10 million.

So wrong benchmarks can be a major issue in terms of your expectations when you show up to that conversation. If you got an email from one of these private equity firms saying “We’ll pay 15 times,” and then you get a valuation to sell to your internal team, you’re surprised when it doesn’t come back at 15 times and comes back at like 11. Well, 11 is great, especially on an internal sale. And again, the deal terms are more than going to make up for it, because to get that high number from PE, we’ve got to be willing to stomach those terms, which nobody wants.

So that is one component, well, four components technically, one genre, one theme here that really can undermine your effort. The nice thing is, while I talk about four mistakes that can undermine the value of your business, there are also a lot of other things, some that will seem obvious, some less obvious, that are very direct levers you have a lot of control over. Ryan, I think this stuff certainly comes up in the debrief calls, and I know you see improvement in these things when people are valuing their business every year, because these are things you have a lot of control over at the grassroots level in your office.

Ryan Grau: Yeah. So this is where we get into KPIs. For those who are wondering, KPI stands for key performance indicator. There are a lot of factors, a lot of attributes to your practice. And as David has talked about, timing is important.

It’s funny. When we work with clients where there isn’t an imminent transaction taking place, when they’re planning ahead and doing their valuation, sometimes the feedback that we’ll get is, “If you added a question around this specific topic for my type of practice, you’d have better benchmarking data.” Which is appreciated. We take feedback, and that’s how our questionnaire has evolved to be the length that it is. So thank you, everybody, for doing that. And sorry to everybody who now has to fill out our questionnaire.

But for those of you who are up against the wall trying to fill out the questionnaire, the feedback that we commonly get is, “You don’t need this information.” It isn’t important until you get the value, and then it’s, “Well, how much emphasis did you place on this?” This really boils down to business preparedness when you have a valuation done. Starting earlier in the process will help you prepare.

Now, when it comes to the factors that impact value, again, there are a lot of them. Almost all of them can be compartmentalized into one of three things: revenue, growth, and profitability. Just about everything that we talk about can be categorized by how it impacts one of these three factors.

Recurring revenue. This is the biggest risk lever in any business. Actually, let’s back up a second and talk about market multiples in this industry. We talked about the average being 3.27. Well, what is the range for multiples in this industry? Often when you look at other industries, you have a pretty tight range for what most practices are selling for. Not financial advisors. In the financial advisory industry, we have a very broad range. On the high end, including outliers, we’ll have revenue multiples upwards of 5 times. On the low end, we have 0 to 0.1 to 0.2 times.

So what drives that difference? Primarily, recurring revenue. On the higher end of that multiple spectrum, we’re going to have recurring revenue: repeatable, reliable, predictable. On the other end of the spectrum, we’re going to have commissionable revenue tied up with surrender periods, fixed annuities. Again, yes, they may come out of surrender. Yes, they can be reinvested. But as far as the market goes, very little value is placed on that particular product and the commissions generated from it. You can argue with me all you want that you think they’re worth more, but I’m tying my observations back to what people are actually paying for those sources of revenue.

So, recurring revenue. Out of the gate, that is going to set your comp group, because the filters that we run when we pull comps are time, size, and revenue mix. Revenue mix is going to determine where you fall on that scale of who we’re going to compare you to. Now, if you’re outperforming all the practices in that particular cohort with a similar revenue mix and similar size in the last year, sure, there will be a premium. But we’re not going to put you up here with practices that have a completely different risk profile. So recurring revenue sets your risk profile.

Growth rate. Growth rate is very important to practices. Now, how you’ve performed historically is not as important. It is definitely a fact pattern that we’re looking at in terms of how the practice has responded to changes in the market and the industry. For most advisors, their growth is about 50% to 60% market growth. We’re riding the wave. So what we’re looking for when we talk about organic growth is not what the markets are doing. It’s what you and your team are doing.

So there are two different things that we look at in terms of current growth and what’s happening with the practice, and what we’re looking for is systemic issues. One is your net change in assets. That’s the new households you’ve brought in from referrals and the leads you’ve converted, versus the households you’ve lost, and the corresponding AUM between those two cohorts. So we have new clients coming in, and we have clients leaving. The two most common reasons we see clients leaving are looking for a new local advisor, which speaks to servicing issues, and clients passing away. That’s going to set your net assets. So if we brought in 10 clients with a million dollars each, we have $10 million in new assets. We lost 2 clients with a million dollars each. We have a net AUM gain of $8 million in that scenario.

Now, the next factor we look at is what’s happening with the existing client base, because that’s another source of growth in your practice. A younger demographic of client who is accumulating assets and earnings is going to be depositing, putting more assets in. That’s going to improve your total net flows. An older demographic of client who followed your advice and saved and saved and saved for retirement, so they can go buy an RV and visit all the national parks, get a house by the lake, pay for the grandkids’ college, those types of things, is going to be drawing down. It is not uncommon to see a net gain of assets of $8 million. Great. You had solid growth efforts. We didn’t really lose that many clients. But then we look at your net flows and they’re $2 million, because we have a systemic issue with an older demographic of clients who are habitually drawing down their assets, which is completely eroding your organic growth efforts.

And then lastly here is profitability. There is one key thing that impacts profitability in your practice. And no, it isn’t a broker-dealer affiliation. It’s your compensation practices. Poor compensation practices out of the gate will not only tank your profitability, but they’ll yank your value right down with it. And it is very difficult to change the further down the path you get of doing things wrong. That includes things like sharing equity, revenue splits, poor compensation strategies that don’t incentivize the appropriate behavior, and not layering in options to participate in equity, either phantom equity or real equity, at the appropriate time for the appropriate staff. So poor compensation strategies, and not using the equity that you have in your practice to incentivize, retain, and reward, are going to have direct impacts on the value of your practice.

These are all the things we’ll talk to you about as we go through your valuation, as we look at your KPIs and talk about issues and how to correct them, and as we talk about tactical short-term and long-term decisions that you can make to improve your value.

Now, let’s talk about those other KPIs, because these come up all the time. Just to give you a quick example, multi-generational planning. If we’re focusing on multi-gen accounts, a lot of people say, “No, I have a minimum. I don’t want to fuss around with it.” Well, okay, but if you have a client that passes away and you don’t have any way to retain those assets, that’s gone. You now need to go find another account to replace the one you lost. So multi-gen planning means having some of those smaller accounts. Yes, it will impact your average revenue per household. That’s not a macro valuation mover. Again, we talked about the three things that are going to move value.

So let’s break these down a little further, because what we have here are value drivers, supporting factors that adjust risk, and fact patterns that help inform the story about systemic issues and opportunities within the practice.

Again, the value drivers are what we talked about: recurring revenue, growth, and profit margin. Pricing is another key one. And then client age and AUM concentration. AUM concentration is a big one that a lot of people overlook. If you are active in multi-gen planning, yes, that can reduce the average age of your total household base. Great. But what we’re going to be looking at is the average age of your assets. If your assets are concentrated with an older demographic of client, it’s going to have an impact on your valuation. Like I said, about 50% to 60% of the growth in these practices, and more in some cases, is driven by what happens in the market. If we have an older demographic of client, we’re going to have a more conservative portfolio mix, which means we’re not going to participate in as much market growth. So now our growth levers start to get tempered, and that’s going to impact the overall growth of the firm.

And the last key value driver here is key-person dependency. Again, this is all about risk and how the practice will perform absent you being there. Creating equity pathways, bringing partners into an equity position, sharing equity: that all starts to diversify the goodwill and the key-person dependencies in the practice.

A key thing that we run into with a lot of practices is the name on the front door, personal branding. Just don’t do it. Having your name on the front door introduces so much risk, especially with how much information there is and how fast information travels nowadays. Something happens in the community, you get pulled over for something that hits social media, and it gets tied right back to your practice. Immediate impact. So all personal branding is doing is amplifying key-person risk and personal goodwill. Those are all things that are going to decrease value.

And then there are other factors like your client tenure, your total headcount, and meetings outside of the office. These are all factors. I’ll throw other ones out there from the fact patterns, like your revenue per household and assets per household. Those are all informative. They do have an impact on value to an extent, but by themselves, they are not major levers that are going to move your valuation.

So if we’re benchmarking you and you’re under on some of these levers, then we need to go back to how we fix them and make them better. A lot of the levers here aren’t something we’re going to fix overnight, or in the next 3 months, or the next 12. It takes 24 to 36 months to change a lot of these fact patterns for the better and for them to show up in your valuation. So that is, again, why it’s important to start earlier.

Also, there’s no reason to wait on getting your valuation. The cost is nominal. The process, while it is involved, is very eye-opening. And again, it’s more than just getting the number. It’s understanding where all of the information that you have in your CRM and other places, like with your broker-dealer, lives, how and where to get this information, and how your practice looks.

So again, this is why I would recommend that at the end of the year, when you’re closing out your books, you get your valuation done. That causes you to reflect on what you and your team have done, what worked, what didn’t work, and what you would do differently. To make those assessments, you’re going to have to pull the information and share it with us when you’re doing your valuation, and then we can start talking to you about the tactical decisions for how you can continue building and growing value.

So I’ll stop there, Dave. Sorry. Anything that you want to add, or that I glossed over?

David Grau Jr.: Not that you glossed over, but one of the questions that came in, I guess they’re asking because you went through it quickly, is about out-of-office meetings and how those factor in. Is that a positive? Is that a negative? I think I know the answer, but I’d like to hear it from the expert.

Ryan Grau: So meetings outside of the office are something that has started to show up in valuations over the last four to five years. The reason is, and there’s a lot of information about this, clients find the most satisfaction with their advisors when they’re offered a hybrid solution.

I talk to people all the time who will argue this, that in order to build the best personal relationships, you need to go sit down for three hours with your client, just talking with them, playing golf. What we are looking at here with meetings outside of the office is this: the more face-to-face meetings you have, and when you’re meeting clients outside of the office, that can have an impact on the attrition of your clients in the event of a sale. Again, in a peer-to-peer scenario, it also can substantially reduce market demand.

David Grau Jr.: Yep.

Ryan Grau: So, David, you do the M&A reviews every year, and watching those M&A reviews, and also looking at our transaction data, we are consistently seeing, year over year, more transactions happening across state lines. Clients have moved, advisors have moved, and they’ve maintained relationships because of the ability to have virtual communications and virtual meetings. So if you aren’t training your clients to use virtual technology for meetings, you’re missing out on opportunities. Also, having a face-to-face meeting, whether it’s in your office or outside of the office, is generally going to be more expensive compared to having a time block where we can log in and have a virtual meeting.

David Grau Jr.: And you take the good with the bad. If the reason you have your entire book of business, or a large segment of it, is because your differentiator is “I’m going to come sit in your office or in your home or at Starbucks with you,” then you take the good with the bad. Is that going to help your value? No, not a chance. But is it going to help your value to have those clients, as opposed to not having a book of business? Well, yes. Again, it’s about being able to make informed decisions and have reasonable expectations, to Ryan’s point.

And honestly, if you can be meeting with clients either in your office or, even better, in your office or virtually, that’s better not only from a buyer’s perspective but from your clients’ perspective long term. Do you want to find the best successor for them in Cleveland when you decide to sell, or do you want to find the best successor for your clients in the United States? If I’m your client, I know which one I’d pick, even if I had to get on Zoom one more time today with my advisor.

It happens. Clients are used to it, if you train them to get used to it. Pre-pandemic, none of us were used to Zoom or Teams. We used it, but we’d get on there with most of you, and none of you would have your cameras turned on. Look how far we’ve come. It’s only 2026. As an example and application… oh, go ahead, Ryan, jump in.

Ryan Grau: So one thing I want to add, and I have this conversation with a lot of advisors, is about virtual communication. I know there is a hesitancy for people to engage in it. One, just because they’re not used to it. They don’t feel like it offers the connection of sitting down face to face. Treat virtual meetings like in-person meetings.

One, if you have an older demographic of client that you know is not going to be tech savvy, have somebody on your administrative team reach out and help them get set up prior to the meeting. Maybe that’s 10 minutes before, just to make sure they log in, that they’re all good, and that they’ve got a camera and a microphone that are working.

Next, have a professional background. If you do not have an actual professional background in your office, if you have a stack of papers, toilet paper or paper towels sitting on your desk, or your lunch, put a virtual background on with your branding. Treat this like a professional meeting. You wouldn’t bring a client into your office looking like that. Most people wouldn’t. You’re going to take them into a conference room that’s staged. Same thing with the virtual meeting, and it’s much easier to stage. You put a background on. Stage it, put your branding on it, and make sure that the clients are able to access it and log in. That’s going to create a better client experience.

And then lastly, make sure that they are going to be someplace where they can sit down and have a conversation with you. Not on the road. If they’re on the road, “Hey, I want to talk to you,” and we’re doing our annual review, guess what? You now only have 40% of their attention.

And again, going back to the number two reason we see advisors lose clients: clients looking for a local advisor. There’s a lot of research out there on this. It usually isn’t so much that they’re looking for a local advisor. That’s just the polite way of saying “We’re moving on from you.” It usually boils down to professionalism, serviceability, and client experience.

David Grau Jr.: Yeah. And adding to that, here’s an example and application: Practice A and Practice B, both doing a million a year in revenue. There are plenty of these around, but very different outcomes. If we compare the values over here on the left, $3.4 million versus $2.2 million, you can see examples of why, and we’ve talked about this.

The recurring revenue: huge impact. I think, Daniel, you had a question on the non-recurring multiple, which we haven’t talked about, because it’s tricky. Recurring is relatively easy. 3.27. We told you the number, we gave you the range. Non-recurring is harder. I think the average non-recurring multiple is around 0.63, but nobody pays 0.63 on non-recurring. They pay zero or they pay one. If you have a historic track record of generating these commissions and you can show that to me, I might pay one. If you did a commissionable sale, like an annuity sale, last year and generated $20,000 in commissions, and you’ve never done that before, I’m not paying you anything for that. In fact, I might ask you to pay me, because you have the commission and I now have to service it, and I have the risk. So non-recurring revenue isn’t without value, but in a lot of cases, it has no value.

Nonetheless, here: recurring revenue, the age of the clients. Well, can you make your clients magically younger? No. Can you make the average age of your book younger? Yes, you can. You can focus on multi-generational planning and get your largest, best clients’ children and grandchildren involved in the planning process. Maybe they become clients, maybe they don’t, but at least you know who they are, and we can try to retain some of those assets at your client’s passing, for example.

Build a multi-generational practice. Maybe add a million in revenue. If I’m 65 and I’ve got a 45-year-old CFP on the team, my batting average with young executives is going to be higher than yours if you’re 65 with no younger advisor on the team. So these are just examples where, with just a little bit of time, you could fix a lot of this stuff: multi-generational planning, average age, or the growth rate. We try to keep our foot on the gas and keep growing until retirement. You have the ability to influence, directly or indirectly, most of the factors that impact the value of your most valuable asset.

So we’ll wrap up and land this plane here with the last couple of slides on a few quick myths.

Number one: “My colleague sold for 5 times, and my practice is similar.” You know where that myth is going. You might be worth five times. You might not. The key point is understanding, which you all know at this point, how he or she got to the five times number. If that’s five times and a duffel bag full of cash, then find out who their buyer was and start reaching out. But in reality, usually, and by usually I mean all the time, if you’re getting five times or one times, it’s for a reason. There’s no stupid money. There are no private equity firms out there just throwing money around. Private equity is good enough that they’re the smartest person at the table, let’s put it that way. So if you think they’re overpaying for your practice and you’re just in the right place at the right time, you’re not. They’re really good at this stuff. So just understand the multiple and the terms. These things go hand in hand. You can’t have one without the other.

The next one here: “I’ve got a million in fees and $100,000 in overhead. At today’s multiples, I’ll take the 9 or 10 times, because that puts me at a $9 million valuation.” That dog does not hunt. And by that, I mean I told you what the multiples of earnings were, but we don’t get to selectively apply them.

In a case like this, with a million in revenue and $100,000 in overhead, you could get 10 times earnings. The problem is, the buyer that would pay that for your practice is going to come in, look at your million in revenue, and normalize for replacement compensation for someone to run that book. So there’s $350,000, because we need somebody who can do everything for a book this size: meet clients, rebalance accounts, handle RMDs. So we’re going to have to pay them, what, $350,000? We’re going to need another assistant in there more than likely, so we have some capacity. We’re going to have to standardize the investment management solutions here. All of a sudden, you’ve got a practice that was doing a million in revenue and $900,000 in profits, and that’s now normalized by the buyer down to about $300,000, which they’ll pay 10 times for, which is $3 million, which is about the same as three times top-line revenue.

So for businesses, larger enterprises with a couple million in revenue and above, you value them based on earnings, because you have a legitimate business that can operate independent of you. Below that, it’s revenue.

The last couple here: “Valuation doesn’t matter, because value is what a willing buyer is going to offer me.” You’re not wrong, actually, and I will concede the point on this one. But the reality is, let’s say you’re working with our listing team, Kristen and Eliza, and Jordan when she’s back. They go through this process and they’ve gotten you five offers from five great candidates. We’ve eliminated the folks who aren’t a good fit. You have five offers. Well, by this same logic, there are five different values. Kind of, like each buyer is going to have their own financials, metrics, and assumptions. However, how do you know which one is right, which one is a good deal or a bad deal? You can’t just take the highest one, because the highest ones can come with different terms. You get a valuation done. You get a neutral third-party opinion of value that’s based on what’s actually happening out there in the market. It’ll help you make more informed decisions.

And the last one is, “My broker-dealer gave me a valuation, so I don’t need a third-party one.” What you have is an opinion. What you don’t have is a valuation. I don’t want to split hairs here, but you need unbiased advice from an expert, and there isn’t a single broker-dealer in the entire country that has that on payroll. There are so few people who know this industry, have expertise in valuation, and have the data to back it up. I’m talking about the largest independent broker-dealers in the country. We’ve seen their valuations, and they’re not terrible. For simple benchmarking purposes, just to get an idea of what it’s worth, they do a satisfactory job. If you’re doing anything beyond that, you need an actual opinion of value from somebody who’s qualified to give it to you.

So these are just a few examples. I think the last one is a good transition point to hand the baton over to you, Ryan, because there are tools out there to estimate your value. You can probably use Claude or ChatGPT to get a decent idea of your value. There are also times when you legitimately need an expert’s opinion. And I think, Ryan, that’s where you’re going to land the plane.

Ryan Grau: Yeah. So, when to get a formal valuation. This goes back to what we were talking about: whether it’s binding or decision-making. When it’s a binding decision, get the valuation done as soon as you can. But ideally, you’ve been through the exercise before, so we know where the information is and what the information should look like. Often the first time you go through the valuation process, it’s going to be a very difficult process, because you’re going to have to round up a lot of information to share with us about your practice. The second time you do your valuation, it is substantially easier, because now you’ll have the information and you’ll know where to get it.

So we offer what we call our Annual Valuation Program. We offer it to our clients specifically because we’ve had so many come back to us year over year wanting to get their valuation. Not because they’re transacting, not because they’re looking to sell their practice, but because they are looking to grow and build, and they want to understand what tactical decisions both they as the owner and their team should be making in order to improve value.

And what’s interesting is, in working with all of our clients, I know right away, just by looking at how firms compare on their KPIs across the various attributes, which ones are invested in their business and which ones know the levers to be pulling and focusing on. We do a 1 through 5 scoring, and the practices that have had their valuations done frequently, at least once a year, you start seeing them move up the scale, and their valuations move up pretty substantially as well. It helps you understand where to make tactical decisions instead of spinning your tires. So we help you gain that traction to build value in your practice.

So again, there’s no point in waiting. Valuations are not expensive. They’re very informative. And one of the additional benefits we add to the valuation process is that after we’re done with the valuation, we don’t just kick it over to you and say, “Hey, good luck, hope your transaction ends well.” We spend the time to talk to you about it. We will spend a full hour going through your valuation and talking about what you can be focusing on, both short term and long term, to improve your value.

So, Dave, the slides went away. You’re spotlighted.

David Grau Jr.: Well, I don’t want to be spotlighted, but I’m glad the slides went away, because we’re right at the top of the hour anyway. And fortunately we got through, I think, all of the questions. The last one, actually, Ryan, is a softball for you. So John, thank you for asking it. I was typing the answer before my PowerPoint crashed. You see the question there, Ryan. John’s comment: he had an advisor send him a valuation that the advisor ran through ChatGPT. It was egregiously off by several million. “These LLMs are made to appease the user. Can you comment on that?”

Because we were talking about this the other day, kind of like the advisor being replaced by AI. The advisor plus AI, ChatGPT, Claude, whatever the model is, that’s a pretty powerful combination. The client plus AI replacing the advisor is dangerous. And I think it applies here in valuation too, right?

Ryan Grau: Right. Yeah, absolutely. The AI doesn’t have access to the information that you need in order to do a valuation, which is the transaction data and the benchmarking information. That’s what’s unique about Succession Resource Group. One, we partner with some of the largest lenders in this space to get an understanding of what practices are selling for and what they’re underwriting to, and that information gets shared with us. In addition, we have our deal structuring team and our seller advocacy team, where we’re completing deals. So in those scenarios, not only are we doing the valuation, we’re completing the deal, and all of that goes into the database. That is what informs my benchmarking, the valuation multiples that we’re pulling for you, and how and why we’re adjusting those multiples.

When you put information into AI, it doesn’t have access to that information. A lot of the data on these practices is handled by private firms like Succession Resource Group, so it’s not out there in the ether. So there’s very limited anecdotal information it’s going to be pulling from. It’ll go to articles, but we know after listening to today’s webinar that there’s a lot of information out there about what the pricing multiples are for these practices, but we don’t understand what drove that pricing multiple. We don’t know what the deal terms were. We don’t know what specific interests or synergies came about as a result of that transaction.

So yes, if you’re plugging parameters into any AI model and saying, “Tell me what my practice is worth,” you’re going to get a wild-ass guess at best. And anytime you are going to be making a financial decision, or if it’s going to be authoritative, you’re going to have to have a valuation done by a professional.

And again, we try to keep the cost as realistic and reasonable as we can, so it isn’t a cost burden. We’re not talking $25,000 to $30,000 to get a valuation. We’re talking a few thousand dollars and several hours of your time, or if not your time, somebody on your team’s time, to fill out the questionnaire. For what I will say is invaluable information.

David Grau Jr.: Well, the question is a good one, because I think about it as a business owner. I use Claude and ChatGPT sometimes to try to understand some of the contracts that come across my desk, and it gives me suggestions. The problem is, I can read, but I am not, in fact, an attorney. So as the end user, I can’t judge right from wrong as you get into these areas of expertise, any more than all of you listening could plug these questions into ChatGPT, Claude, or all of the above, using one of the aggregator tools for the AI models. If you’re not an expert in that genre, you’re just sort of taking it at face value and hoping that it’s right. And the problem is, if all of the data that we use were out there in the public sphere, it might get close. It might not. But the data’s not even available, so it has to use averages. So anyway, this is one of those areas where you will get what you pay for.

Ryan Grau: Yeah. So, Dave, a question for you. Sherman submitted this in the Q&A, and I’m curious whether your answer differs from mine based on what you’ve seen on the deal side. What he’s referring to is effectively a sell-and-stay strategy, where we’re selling the practice and staying on board for several years.

I run into this all the time. What I see in conversations with buyers and sellers is a blending of the economics between the transaction for the assets being sold and the compensation for your services post-transaction. In my world, I like to compartmentalize things and address them one at a time.

So there’s a sale that happens here. We’ve had a valuation done on the book of business. We know what the value of the book of business is. We’ve agreed to the terms and price. Box checked on the sale of assets. That happens.

Now, you staying on board. If you want to stay on board but the buyer doesn’t want you to, well, you’ve got a problem. But let’s assume there is a mutual need, where the buyer wants you to stay on board for a period of time, help transition the clients over, and maybe solve a growth problem they currently have because they don’t have the capacity. That second block that needs to be addressed is you, now, as an employee of the firm. There can be different scenarios. You could be an employee of the firm servicing your book of business, or an employee of the firm focusing on growth. It really depends on the role. But the two things that need to happen are negotiating the sale and deal terms for the assets of the book of business, and then negotiating the terms of your role as an employee or an independent contractor.

What I often see, though, is, “Well, they want above-average compensation, so we’re going to take it out of the value.” And that’s where we see a lot of the blending. Do you see that? What’s your approach? What’s your suggestion?

David Grau Jr.: I was wondering if there was a question coming. You just talked me into submission. I would say your approach, academically, is spot on. To start with, we’ve got to figure out the value. And then, what’s the value of paying you for your time? You’re probably not going to work full time. So if you’re going to stay on and work part-time, what are you going to do? “I’m going to be a rainmaker.” Okay, great. They’ll happily pay you 50% or 60% of first-year revenue from the stuff you refer in. So a lot of it depends on where you end up.

As a buyer, for me, there’s just the economics of the thing that I’m buying. I’m buying $5 million in revenue, and it comes with staff. If you want to stay on, great, but this thing has to cash flow. And if it doesn’t cash flow because you want to stay on and get paid more, then we’re squeezing a balloon. Then it’s coming out of the price, or we’re going to have to adjust the terms to make the deal work.

And the problem, as much as I love those sell-and-stay models, because they give you a little bit longer off-ramp, is that in most cases the buyer is, in fact, lowering the price to give you more comp, which means you just managed to turn capital gains into ordinary income. So when you finish your deal and sign on the dotted line, and the IRS auditor walks by and high-fives you, you know you did something wrong.

So there are instances where, to your point, Ryan, you negotiate in a vacuum. Treat this like a used car deal. We’re only going to talk about the sale of my practice. Now we’re done with that. Now we’re only going to talk about my compensation. And if we can’t come to terms on reasonable comp, then either this isn’t the ideal fit for me, or I just don’t stay on and keep working, or we change the dynamics of the role and the assumptions. But these deals are happening more and more, and there’s a lot more to consider.

The one thing I will close us out with, on price and compensation: if you want to sell and stick around post-sale, please, God, focus on the fit. Because you have two cooks in the kitchen and two entrepreneurs, and you’re both always going to be right, and there might be an occasion where you don’t agree on something. So make sure you can actually work together.

So that’s it, folks. We appreciate you staying on. Those were some great questions, and they gave us collectively as a group a chance to go a level deeper. My guess is that of the questions that were asked, many of you probably would have asked the same one, or at least appreciated somebody else asking it. Having talked about the AI stuff around valuation, Ryan and I are happy that someone asked it.

So with that, that’s a wrap, folks. Watch your emails. As Ryan mentioned during the opening, a copy of the recording will come automatically tomorrow. If you haven’t signed up for the newsletter, make sure you stay in the know, even if it’s just by connecting with us on LinkedIn. We have one last educational webinar session coming up in November, and then come January, we’ll be doing our year-end review, which is everything we’ve learned from this year: multiples, deal terms, taxes. And we’ll share an infographic with you as well.

Ryan Grau: Yep. Followed by, after the annual M&A update, the State of Compensation Strategies for the industry.

David Grau Jr.: Yeah, that’s become a mainstay, because all of us as business owners struggle with how much to pay and how to pay folks. So that’s one where we’re trying to put a spotlight on it and provide some additional transparency.