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I’ve recently been doing some work on determining financial value for financial planning/investment management firms.  These are the firms who develop significant cash flow based on a percentage of assets under management.

One of the firms we are working with is being courted by a consolidator who is rolling up investment management firms.  They are paying ten times free cash flow on closing and fourteen times free cash flow in the future based on certain performance metrics being met.

When I first saw the deal sheet, I didn’t believe it.  As we started spreading our Clients numbers over the next ten years, the offers started making sense and may even be a little low.  In most businesses you can’t count on a blended price increase of 7 to 8% over a ten year period.  In the investment management business you can; at least you can under what one might consider “normal” market conditions.

Investment management firms are paid a percent of the assets they manage.  They don’t bill on an hourly basis and they don’t have a per Client charge.  This means that as the market improves their revenues improve.  For this reason it’s just as important for these management firms to make sure there is little downside volatility in their portfolios as there is for their Clients, but this is a different conversation for another post.

Back to the valuations of investment firms: These firms will sell at higher multiples than many companies because the buyer can count in increased revenues on a year over year basis.  Of course this is based on the firm retaining the Clients they are working with.  If the buyer can craft a purchase agreement that has an earnout based on Client retention it will be a good long-term purchase. 

What this means for those who operate these types of firms is that there is a market for your business and that market is very strong.  I believe you must be in the $200,000 in assets under management space before the higher multiples are available.  Once you get there the rewards are significant.

One of the things a smaller firm might think about is combining forces with several firms about their size.  When it gets time to leave your business there probably will be a buyer who will pay you a very nice premium for your business.

Most people think there is little worth to investment management firms.  I’m coming to believe that there is a great deal of value in these types of firms.  It just takes planning and foresight to put the firms together and then assemble a strategy that will attract the right buyer.  Like most things in the business transfer business forward planning is important.  So start early and enjoy the fruits of your labor.

As always I appreciate hearing your opinion on how to value a wealth management firm.

Josh Patrick


Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

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Topics: exit planning, business exit planning, Valuation, valuation for wealth management firms, Exit planning for advisors

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