Are you seeking a potential sale, merger, or recapitalization using outside capital? Perhaps you have a talented team of advisors and staff who are eager to take over the business in the future?

Whatever the strategic direction you’ve chosen for your RIA, understanding and executing the right strategies to build enterprise value should be your focus as a majority equity holder in your firm. This will garner attention and high bids from today’s top RIA acquirers and investors (if that is your objective) and will help ensure you leave a healthy, growing company to your internal successors.

Team of people at wooden table taking notes during meeting.

We’ve executed hundreds of RIA valuations for external transactions and internal recapitalizations so we understand the key metrics that will directly influence your RIA’s worth.

Performance indicators to help you unlock the true value of your RIA:

Scale: Consistent Cash-Flow with Margin Expansion Potential
Organic Growth: Embedded, Sustainable Capabilities
Risk Management: Mitigate Vulnerabilities
Quality: Diversified and Recurring Income

Scale: Consistent Cash-Flow with Margin Expansion Potential

Firms with predictable and steady cash flow are considered more “institutionalized,” and therefore earn higher multiples in a sale context. RIA owners who regularly invest in their business to improve margins over time are highly attractive.

Historically, according to the 2023 InvestmentNews Benchmarking Study on Advisory Compensation & Staffing and Pricing and Profitability, profit margins for typical advisory firms are just over 25%. We view 25% net income margins as the bare minimum required to achieve scale due to the reinvestments for these businesses. We counsel our wealth management clients to target 30-35%+ net margins via sound investments in technology and operational infrastructure.

While investment is a critical part of creating expanding, positive cash flow, so is keeping costs in check. At ADP, we delineate and analyze Human Capital expense (compensation, benefits, and equity awards for employees and owners) and Overhead (all other operational expenses). There are many ways to keep costs down, and each firm will have its own approach. Still, top firms tend to keep overhead at 15% of revenue and human capital at no more than 45-55% of revenue.

Organic Growth: Embedded, Sustainable Capabilities

Although your ADV says, ‘Past performance is no guarantee of future results,’ acquirers of — and investors in — RIAs will not only want to know the historical success of your RIA, but also how you will keep growing the following three to five years. We call this “embedded growth potential,” and it’s highly valuable.

Do you have programs to bring in new clients as well as earn more share of wallet from your current clients? InvestmentNews’ 2023 benchmarking study found, on average, that RIAs grow new client households by 5.8% while losing about 2.7%. They write, “The net change in client relationships (+3.1%) from organic growth is perhaps the best measure of the ability of a firm to market itself and attract new clients.”

Word of mouth and client referrals are often good sources, but they’re only a starting point. Some considerations for marketing programs to help ensure a steady pipeline of new client interest:

Host an educational series for current clients and invite them to bring family and friends;
Develop resources on your website to educate potential clients on wealth management topics, with a clear call to action;
Build firmwide expertise for a niche client-style and develop sales vehicles specifically tailored to this niche;
Ensure you’re taking advantage of digital marketing as this is how the top firms in the industry truly turbocharge their organic growth;
Explore inorganic growth strategies to add talent and revenue to your firm. This, of course, requires capital given today’s high valuations — so simultaneously exploring a potential capital partner may be required. We can help with this.

Showcase your firm’s growth DNA, and the trajectory it creates, to potential acquirers or investors — as well as to future advisors considering joining your firm

CEO and Senior Advisor discussing client firm's value.

Risk Management: Mitigate Vulnerabilities

Market volatility can affect your RIA’s bottom line, but unfortunately, it’s not something that can be controlled. You can address key firm risks, however; such as assets under management (AUM) and revenue concentration, service levels, as well as advisor loyalty. Stabilizing volatile areas that are within your control enhances your firm’s value.

As part of our valuation methodology, ADP looks closely at client demographics, and we analyze asset and revenue concentration within various age groups. This data can direct our clients on where to focus marketing efforts (perhaps reaching younger clients if the “book” appears to be aging, for example).

Each firm’s ideal client, and client make-up, are different. This is why a thorough analysis should be performed before a potential sale, merger or internal buyout. Still, for the average RIA, the top 10% of clients will account for 30-40% of total AUM. Additionally, ideally about 2/3 of your total AUM is with clients in the attractive 50-70 age range. Another positive value driver: Less than 20% of your assets reside within clients who are most likely in the “withdrawal stage”, aged 70 years and older.

Acquisitive firms are very keen on RIAs with loyal advisors. A non-owner advisor who is a rainmaker is looked at favorably in a sale process. Perhaps most importantly, potential acquirers value those firms whose owners have plans in place to groom young associates into advisors. Taking care of your advisors is part of a strong succession strategy, and can position you for future growth.

Quality: Diversified and Recurring Income

Diversified income streams, particularly from recurrent, fee-based sources, are highly valued. Highlight the quality and predictability of your revenue when you are seeking a sale, merger, or internal recapitalization.

You don’t need me to tell you that clients are continuously demanding more from your firm and your advisors. One main reason for the consolidation in the RIA industry is the need for more services for smaller RIAs. Larger RIAs are looking to add more services, such as in-house tax preparation, trust and estate planning.

Conclusion

As you put together strategic plans for your RIA, ensure you understand where your firm lands on the spectrum of these core metrics, and address any shortcomings. Whether you are looking to sell or partner externally, or build an internal succession plan with your next generation of advisors (G2), having a clear understanding of what builds enterprise value for your firm is critical to ongoing success.

This article — the third in our series “Mastering M&A Fundamentals” — was written by David Selig, founder and CEO of Advice Dynamics Partners. David has over twenty years of experience in M&A, management consulting and financial services. He serves as a champion and advocate for Advice Dynamics’ clients, as he shepherds them through their complex transactions.

Key Valuation Drivers to Unlock the Value of Your RIA