Maximizing the Succession Value of Your Book
You want a fair price for the business you’ve built.
Advisors have many reasons to sell their book of business. You may want to sell part of your book to free up capacity for growth or sell your entire business as you prepare to retire.
Whatever your
succession objectives, the bottom line is you want a fair price for the business you’ve built.
In this article, I will teach you how to assess the value of your book and how to maximize the value of your business so you can get a fair price for your book.
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1. How to assess the value of your book
“What’s my book of business worth?” Whether spoken or unspoken, this question comes up a lot when I speak to financial advisors. So, let’s dig into it.
What’s most crucial in valuing a book is the quality of the clients and assets in the business. That’s because what’s ultimately being bought and sold – the real asset – is the client list. This is essentially the ‘goodwill’ value of your business.
Valuing your book of business often starts with assessing your overall income. While the makeup of clients may differ from one Advisor to another, it likely consists of some combination of trailers and fees earned for service, commissions, and/or referral fees. For simplicity, let’s refer to these as your recurring revenues.
It’s important to consider the quantitative and qualitative factors that influence the quality and sustainability of your recurring revenues. While the following lists are not exhaustive, they highlight some key factors to consider.
"...the real asset - is the client list.
This is essentially the 'goodwill' value of your business."
Quantitative book valuation factors
| Average client age | A lower average age translates to greater predictability of your future recurring revenues |
| Average asset size of clients: | The higher the average asset size, the more lucrative your client base |
| Depletion rate: | The lower the percentage of clients who are in the decumulation phase (i.e. withdrawing from RIFs/LIFs), the more stable your recurring revenues |
| Fee-based vs. commission-based income: | Fee-based income is more predictable for recurring revenue compared with “lumpy” commissions |
| Average number of investments per client: | A lower average reflects a more disciplined approach to portfolio management |
Qualitative book valuation factors
- Do you have a systematic and well-documented client experience process?
- Do you have a strong, knowledgeable team with defined roles and responsibilities?
- Do you have a professional office setup for both virtual and in-person client meetings?
- Do you use technology solutions to efficiently execute your business processes?
- Do you create and maintain up-to-date financial plans for your clients?
- Do you have a defined client interaction and engagement strategy for each client segment?
- Do you have clearly documented meeting notes and records for all client conversations?
- Do you have a good compliance audit rating history?
Book Valuation Multiplier for Financial Advisors
When coming up with a price for your book, apply a multiple to the recurring revenue that you earn. In the financial services industry, the business multiplier typically ranges anywhere between 2x to 3.5x . Deciding where within this range the multiple should be is both an art and a science – guided by the quantitative and qualitative factors above.
An attractive book with high quantitative and qualitative scores would likely be priced closer to the 3.5x multiple while a book with low scores would receive a multiple closer to 2x. However, we also need to account for market conditions and other related factors, such as the quality and consistency of business processes and client engagement strategies, before arriving at the final fair value. When you add this to the mix, you realize that assessing the value of your book is not straightforward and there can be more than one right answer.
2. How to maximize the value of your book of business
It’s good to know the value you can potentially get for your book. It’s even better to know that you’ve maximized that value when you sell your business.
To do this, a good starting point is to look for opportunities to boost the quantitative and qualitative scores we talked about above.
From a quantitative perspective, this can include:
- Sell the lower value clients in your book, so you have more time to nurture high value clients (i.e. those with higher investable assets)
- Build up the fee-based component of your business
- Streamline or reduce the overall number of portfolios that you manage within your book
From a
qualitative perspective, ensure that you have:
- Systemized business processes
- A knowledgeable team
- Adopt technology solutions that enhance your operational efficiency
What steps you take to boost the potential value of your business will depend on numerous factors – not least, your ideal succession timeline. The more runway you have, the more steps you can take to significantly enhance the final value you can extract from your business.
"..look for opportunities
to boost quantitative and qualitative scores"
In some cases, taking bigger steps can lead to greater increases in the value of your book. For example, depending on your current situation, changing dealers may be an opportunity to streamline your portfolio offering, define your client segmentation strategy more effectively, elevate your client experience, attract higher net worth clients, adopt a better tech stack or more robust compliance support. The right changes can, in turn, boost the enterprise value.
Another opportunity may be to shift your business from non-discretionary to discretionary. While transforming your business in this way requires time and planning, becoming a portfolio manager can significantly boost your operational efficiency, overall profitability, and ultimately, the value you can extract when you sell your business. We have helped Advisors achieve this type of transformation with IPC One, our award-winning discretionary wealth management platform, so we have seen just how impactful it can be.
Make the most of your succession opportunity
No matter how near or far you are from succession, maximizing the value of your book is important to ensure you get a fair price for the business you’ve spent years building. This starts with understanding both how to assess the value of your book and how you can take active steps to boost this value.
For guidance on how to maximize the value of your book and achieve optimal succession outcomes, feel free to reach out to our experienced team or connect with me on LinkedIn.
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