3) Growth
A buyer will pay more for a growing practice each year than one in decline. One of the advisors’ most significant mistakes is waiting too long to transition out because they love what they do. By the time many decide to retire (voluntarily or involuntarily), growth will have flat-lined or stalled altogether, making it a suboptimal time to sell. When you are measuring your growth rate each year, focus on measuring these three categories:
Revenue Growth—Annual revenue, year over year. A buyer will use the revenue and free cash flow to pay for the purchase, so demonstrating positive top-line growth is essential. Practices receiving the highest values show consistent growth and diversified sources of growth (referrals, centers of influence, seminars, etc.)—if you can show a three-year track record of growth, the better.
Client Growth – Revenue growth is essential, but it is as important to show that you aren’t just growing based on new assets or revenue from existing clients, as that will eventually “dry up.” It is essential to demonstrate your ability to add new clients and track precisely how prospects source you (existing client referrals, professional referrals, networking events, seminar selling, etc.). It is also essential to document any lost clients and the reason for each. If a successor sees consistent net client growth (more new clients than lost) coupled with revenue growth, they can reasonably expect the revenue to continue to increase. This has a positive impact on valuation.
Asset Growth – The growth of your assets under management is one of the most overlooked valuation components. Still, it is as important as revenue and client growth when evaluating practice quality or “health.” Pay attention to the net flow of assets using the following equation:
(New client assets + new assets from existing clients)