Is Your Firm Worth More Than You Think?

10/08/2007 12:00 am EST


Mark Goldberg

President & CEO, Private Wealth Management

Mark Goldberg, president and CEO of Private Wealth Management, told attendees that merger activity in the financial advisory business has increased because of:

• Wealth management needs
• Advisors’ age (the average is now 53)
• Regulatory rules that distinguish between fees and commission businesses
• More educated consumers who understand fee businesses are flocking to independent advisors

Goldberg mentioned a recent study by Bear Stearns that cited a $37-trillion worldwide industry of investment advisors—$11 trillion in North America alone—and predicted to grow at a pace of 6.8% for the next three years.

Private equity has come calling on the advisory market because of this growth, with many independent advisory firms expanding at a rate of 10%-20% per year.

He told attendees the question is not “What is your firm worth?” Instead, it is “To whom is it worth?”

Banks and accounting firms are interested in per-client revenue and for example, may price your business at $2,000 per client because they earn $200 per year in revenue.

Competitors will pay one-to-two times gross or three times net. Your firm’s worth as a business enterprise is probably secondary. They want your clients to layer onto their platform.

Broker/dealers don’t care about what you earn; they are concerned with how much sales you can put through their pipeline. They may rent your business for five-to-seven years and pay you 20% of the revenues, if you are a large firm.

Private wealth management firms may pay 14x to 16x your net capital. Your earnings as a business enterprise are critical to them.

Mark Hurley, the president and CEO of Fiduciary Network, LLC discussed the growth spurt of the financial advisory industry that began in the late 1980s.

The bull market created a massive subsidy to most advisors. And while some firms realized it wouldn’t last forever and put their excess revenues back into the business, others didn’t, and their businesses suffered.

Consequently, there are currently some 19,000 financial advisory firms, but only 1,100 command about 85% of the assets up for grabs; the remaining firms are just “jobs” for their proprietors.

How to determine that? Ask if the owner is getting more in total compensation than what he would get somewhere else as an employee.

A real advisory business, he said, has substantial cash flow for reinvesting in the enterprise, is fee-only and has several professionals, among other things.

Hurley said the industry has a lot of buyers, and they are paying from $50-$300 million (and up) for successful firms. That often amounts to ten times cash flow, as compared to firms that are just “jobs” that command some one-to-two times cash flow.

Buyers are looking for predictable cash flow, low client turnover of ½%-1%, and consistent annual revenue growth of 6% or more.

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