Know Your Worth: A Guide to Valuing Your Financial Planning Business
Morgan Stanley predicts a rebound in mergers and acquisitions (M&A) in 2025 due to an improved regulatory environment and $3 trillion in uncommitted capital. This is positive for financial planning businesses, as private equity firms consolidate practices through purchase or absorption.
Understanding business valuation is crucial for financial advisors, whether they are selling their practices, planning succession, or securing financing. This article explores the valuation of a financial advisor practice, covering methodologies, factors, and best practices. Read on to learn about the influences on business valuation, how to increase your business’s value, and more.
Why Value Your Financial Planning Business?
Accurate business valuation enables financial advisors to make informed decisions and display their economic worth to potential partners, buyers, or investors.
Strategic Decision-Making
Valuing your financial services business can help you make critical business decisions. Business valuation informs decisions related to mergers and acquisitions, succession planning, and strategic partnerships. In all of these strategic planning scenarios, it is critical to clearly understand your business’s value during negotiations.
Securing Financing
Lenders often require a professional business valuation when financial advisory practices seek financing. This is especially true for large loans or loans involving related parties with potential conflicts of interest. Lenders use business valuation to assess risk and establish fair market value for your financial planning business. There are several types of loans in which valuation is essential, including:
SBA 7(a) Loans
Commercial Real Estate Loans
Loans with Related Parties
Expansion or Buyout Loans
Retirement Planning
Financial advisors who own their practices must prepare for the future with retirement planning. Like many business owners, a financial advisor’s business likely makes up a significant portion of their overall wealth. Business valuation is critical in retirement planning, enabling you to identify improvement areas and devise a planned exit strategy. Advisors can work to maximize their value by streamlining operations to cut unnecessary costs and optimize their potential.
Key Factors Influencing Business Valuation
Business valuation is impacted by a handful of factors, including:
Revenue and Profitability
When determining business value, advisors will reference historical and projected profitability to provide stakeholders with a view into the future financial performance. This helps investors or analysts assess a business's health and potential value. Recurring revenue, client retention rates, and profit margins are all important indicators in business valuation.
Client Base
Your client base will also be considered during the business valuation process. A loyal client base, especially a diverse one, is extremely valuable to a financial planning business. To help accurately determine your business's value, get a breakdown of your client demographics, assets under management (AUM), and client concentration. High client churn and concentration can negatively impact valuation, making your business appear as a riskier investment.
Assets Under Management (AUM)
Assets under management (AUM), or the total market value of client investments managed, plays a significant role in financial planning business valuation. Although it is a contributing factor, it is not the only factor. Quality AUM is more important than simply the quantity of assets accrued.
Practice Management and Operations
You can’t discount the value of efficient operations systems, strong processes, and innovative technology. How you manage your financial advisory practice and the team underneath you matters in business valuation. Documented procedures and a strong team increase your business's value and potential profitability.
Reputation and Brand
A strong brand and reputation are critical to improving the value of a financial planning business. Consider your online reviews, average rating, and your business’s community involvement. Industry recognition also plays a role during business valuation as it shows prestige and influence.
Potential Expansion
Expanding a business's lifetime revenue is a key indicator of an opportunity that has yet to be captured. According to Asset-Map data, professionals who focus only on one core line of business tend to miss significant opportunities that would increase the practice's overall value, improving its potential cross-sale. Asset-Map’s tools enable professionals to find opportunities to increase a practice’s value.
Common Business Valuation Methodologies
It is essential to choose the right method for your business. Professionals commonly use three popular business valuation methodologies.
Asset-Based Valuation
The asset-based approach calculates a business's net asset value. It subtracts liabilities by adding a business’s tangible and intangible assets. This method is best for practices with many physical assets and is also valuable for business owners considering liquidation. However, it isn’t the best option for measuring intangible assets and growth potential.
The formula for asset-based valuation is:
Business Value = Total Assets − Total Liabilities
Income-Based Valuation
Income-based valuation checks a business’s ability to earn income in the future. Two income-based valuation methods are discounted cash flow (DCF) and capitalization of earnings.
DCF estimates a business’s value based on its future cash flow, accounting for the time value of money. A business forecasts its future cash flows and discounts them based on risk to determine its present value.
Capitalization of earnings uses the expected annual earnings and is divided by a capitalization rate reflecting the risk and anticipated returns of a financial advisor's book of business.
Market-Based Valuation
Market-based valuation estimates a business's worth using recently sold comparable or publicly traded businesses. It relies on market data to determine what buyers might pay for a business. This valuation method has downsides: market fluctuations are common, and a business’s unique advantages aren’t always considered. Finding comparable transactions to support an accurate estimate can also be challenging.
The Business Valuation Process
Business valuation is not typically a DIY process. It requires expertise, objectivity, and experience. We will outline the steps of the business valuation process.
Hiring a Valuation Expert
Working with a qualified business valuation professional is highly recommended if you want to sell your financial advisory practice. When searching for a business valuation specialist, look for one or more of these credentials:
Accredited Senior Appraiser (ASA) from the American Society of Appraisers
Certified Business Appraiser (CBA) from the National Association of Certified Valuators and Analysts (NACVA)
Certified Valuation Analyst (CVA) from NACVA
Accredited in Business Valuation (ABV) from the American Institute of CPAs.
Additionally, they should have a strong legal background, expertise in different valuation methods, and industry-specific knowledge. Working with a quality valuation expert helps ensure an accurate valuation of your financial planning practice.
Gathering Financial Information
A business valuation specialist will need certain financial documents and key data points to make an accurate assessment. The essential documents for business valuation include:
Profit & loss statement
Balance sheet
Cash flow statement
Tax returns (past 3+ years)
Accounts receivable and accounts payable reports
Business debt schedule
Inventory reports
Fixed asset register
Industry and market data
Understanding the Valuation Report
The key components of a business valuation report include:
Executive Summary
Overviews the business valuation’s purpose, such as for a sale, merger, acquisition, or legal requirement. It also gives the estimated business value, which methods were used, and the valuation date.
Valuation Context
The valuation context covers the structure and ownership details as well as the business’s history. It typically also includes the industry and market trends impacting valuation and risks. This section provides a broader context of a business’s position, the methodologies used, and the objectives and standards to guide the process.
Market Analysis
This section provides insight into internal and external factors that impact the business, such as industry trends and landscape, economic conditions, and more. It often includes a SWOT (strengths, weaknesses, opportunities, and threats) analysis.
Financial analysis
The financial analysis section assesses the business’s profitability and stability using income statements, balance sheets, cash flow, profit margins, debt-to-equity, return on investment, and more.
Valuation Methodology
This section highlights the methods used in the valuation and explains why the approach was used. It is used to justify the chosen methods and share why they effectively value the business.
Valuation Results
This concluding section details the final value or range based on the analysis. It should address discrepancies and note the factors impacting the business’s value.
Increasing the Value of Your Business
There are several relatively simple ways to increase the value of your financial planning practice. Use these tips to improve your future valuation results.
Improving Profitability
To improve profit margins and increase revenue, businesses can expand their offerings, switch from commission-based income to retainer fees, target a lucrative niche, and focus on client retention. You can also consider offering virtual financial planning services via video calls.
Growing Your Client Base
Adding more high-quality clients to your roster helps boost revenue, increase AUM, and scale your business. Utilize digital marketing efforts, send email newsletters, and understand clients’ pain points.
Streamlining Operations
As mentioned, efficient systems and processes are vital to higher business valuation. To improve your operations and processes, utilize technologies like Asset-Map. Asset-Map enables you to engage financial planning clients in deeper conversations. It also increases value by finding opportunities for your practice to grow. Automate tasks where you can to increase scalability potential.
Unlock the Value of Your Practice
Understanding business valuation is critical for financial advisors because it allows them to make informed decisions regarding retirement, mergers and acquisitions, and strategic partnerships. Get a professional business valuation done today to see the value of your financial planning practice.
Try Asset-Map to elevate your practice and build deeper client relationships. Our unique visualization features make it easy to lay out a client’s entire financial picture. You can even use Asset-Map to assess your business for opportunities. Try it today.