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Your Firm Isn’t Worth What You Think: Report

October 17, 2014

“Compared with actual deals closed within the past 12 months,” owners of financial-advice firms have an exaggerated sense of what their practices are worth. That’s the word from Cerulli Associates.

“With the current imbalance of buyers to sellers in the market, advisors are overly optimistic about the enterprise value of their businesses,” says Cerulli’s Kenton Shirk, commenting on findings in the research firm’s latest Cerulli Edge Advisor Edition report. It finds advisors, on average, value their businesses at 2.8 times revenue. The report, which FA-IQ reviewed and which is available for purchase from Cerulli, says the multiple should be closer to 2.2 times revenue.

Despite talk of more transactions taking place recently, some dealmakers say the action falls far short of pre-2008 levels, with buyers and sellers regularly failing to come to terms. Adding to the stalemate, many older FAs — key drivers of today’s activity — aren’t “exactly pining for the golf course,” as one industry expert recently told FA-IQ.

One way to get more deals done might be to include more sophisticated metrics in valuation processes. The Cerulli report finds 71% of sellers set firm valuations based on revenue multiples. Few incorporate measures such as discounted cash flow analysis and EBITDA measures — metrics Cerulli says are more complex but may lead to valuations buyers and sellers can work with to reach agreement.

By Murray Coleman