Today's Viewpoint: A MarshBerry Publication

What Drives Value in Your Wealth Firm?

Knowing the value of your firm may have more to do with running a better business than about what it might be worth to a potential buyer. So, do you know the value of your firm? And do you know what investments you should be made to improve its value?

What drives value in your wealth firm? According to Rocket Mortgage, converting your garage or basement into a living space doesn’t add significant value to your home. Instead, they recommend kitchen upgrades or installing hardwood floors. Increasing the value of your wealth advisory firm has similar guidelines, and it’s important to understand what really drives value in your business – whether you are looking to perpetuate or not.

Why is it important to know the value of your wealth firm?

As individuals, everyone is planning for retirement. You are contributing to your retirement account and growing its value. And while you might be years away from retirement – it’s important to periodically check in on your 401K, know the balance, make adjustments and ensure you’re on track to reach your goals.

Knowing the value of your wealth firm is the same. Very few wealth advisors start their own firm with a “When am I going to sell?” mindset. It might be something in the back of their head, but they believe they have plenty of time before they need to develop a perpetuation plan for their business. But your business is probably your largest asset, why wouldn’t you want to periodically check in to ensure you’re allocating capital correctly and staying on course with your strategic vision?

Aside from selling your firm, there are many other reasons for wanting to know the value of your firm. Less obvious reasons include – if you plan to offer shares to employees or the need to buy out a partner. At some point, you may need a valuation for tax purposes or for securing a loan. The fact is, knowing the value of your firm has more to do with running a better business, than what it might be worth to a potential buyer. “Value” is more than just a financial number. Knowing the value of your firm creates conversations, reveals opportunities, and drives decisions that will further optimize its worth.

How is a firm’s valuation calculated?

There is a common misconception that an insurance firm’s valuation is strictly based on a company’s current financial statements. The reality is that two firms with the same revenue volume and EBITDA margin (Earnings Before Interest, Taxes, Depreciation, and Amortization) may generate very different valuations.

While past and current revenue is easy to plug into valuation calculations – it’s harder to predict a firm’s operating risks, which can affect sustainability, predictability, and future earnings. And the harder it is to predict future earnings – the lower a firm’s value will be.

Firms with predictable earnings, as demonstrated by fewer operating risks and strong consistent historical profit margins, will generate higher valuation multiples. Being able to show future earnings is tied to several operating risk factors – ranging from the ages of key employees to your client mix. The assessment of operating risk is more of an art than a science and could vary greatly depending on who you ask to do your valuation.   

What are the true drivers of value?

In order to help increase your valuation, you need to understand the best areas of your business to put your dollars in. Going back to the “home value” analogy, there are investments in certain areas of your wealth business that will improve your company’s value more than others. This isn’t to say that investing in areas that don’t improve value isn’t important. But if your goal is to improve valuation – you should understand the parts of your business that will add to its perceived value, or at least reduce risk in the eyes of evaluators.

Here are just a few top drivers of value you should consider:

  • Build a strong talent bench. Investing in talent and having the right compensation strategy is paramount in creating value for your firm. If your average advisor is closer to retirement age than to entry-level age, your talent profile is unbalanced. And in a competitive labor market, having the right comp structure that rewards high performers will ensure you are attracting and retaining the best talent.
  • Offer specialization. Firms that offer niche services that are geographically focused or cater to clients with similar financial needs are considered “specialists” and are often viewed favorably from a value perspective. Look for ways to dig deeper into what you are best at and focus on your core competencies. Being a generalist or jack-of-all-trades isn’t always the most attractive to potential partners.
  • Institutionalize your client relationships. If the owner or a handful of rockstar advisors has a relationship with the majority of clients, you are at risk of being viewed as a “hit by a bus” operational risk. (i.e., What would happen if you got hit by a bus?) By transitioning part of your book and those relationships to others, you can free up
  • Diversify your revenue. Do you fully understand the demographics of your book? Does a large portion of your revenue come from a smaller percentage of your client base? How much of your book is in a decumulation phase vs. an accumulation phase? Look closely at your revenue sources and find ways to diversify them.

Is now (during a turbulent market) the right time to do a valuation on your firm?

Whether you are considering a partnership now or looking down the road toward a perpetuation plan –the current economic environment might be the perfect time to do a valuation. If you are a wealth firm that believes your revenue or income is the best measure of your value, then that means you are at the mercy of the economy and market conditions. During a down market, you are most likely losing revenue, and with it, losing value.

So, the question is – are you creating value for your firm that isn’t tied to market conditions? Are the initiatives you are currently pursuing really adding value to your firm? During a positive economic environment, it may be difficult to quantify the impact certain investments or strategic decisions are having on your business. After all, a rising tide lifts all boats. In a down market, however, you may be in a better position to see where the leaks are as it relates to your strategic decisions (or non-decisions). A challenging economic environment might be a good time to stress test your firm’s value and find out what you are REALLY worth. Reach out to our team today for financial advice, investment banking services, and consulting services.

If you think you are ready to start the conversation about your firm’s valuation or would like to learn more about how MarshBerry can help you drive more value for your business, please email or call Kelly Mills, Director, at 214.814.4517.

Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, LLC, 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122 (440) 354-3230

Contact Kelly Mills
If you have questions about Today's ViewPoint, or would like to learn more about how MarshBerry can help your firm determine its path forward, please email or call Kelly Mills, Director, at 214.814.4517.

MarshBerry continues to be the #1 sell side advisor in the industry (as ranked by S&P Global). If you’re considering selling your firm, we are the best choice to help you through the complicated process. If you don’t hire MarshBerry, hire a reputable advisor that can help you navigate one of the most important business decisions you will ever make. You will be much better off having an advisor in your corner that knows the industry than trying to do this on your own.