What’s Driving Valuations?
As RIAS seek to make themselves attractive to possible acquirers, they should focus on elements that are most valuable to buyers.
As RIAS seek to make themselves attractive, they should focus on what is most valuable to buyers.
EXACTLY HOW RIAS ARE VALUED IS MORE relevant than ever in a red-hot market. Vic Esclamado, managing director at Devoe & Co., says there are three drivers of value RIAS can’t afford to ignore: growth, cash flow and risk.
Speaking to RIA owners at the firm’s inaugural M&A conference after the Marketcounsel Summit, Esclamado stressed the importance of focusing on what’s really valuable to buyers when prepping a firm for a sale.
Solutions for growth, especially when measured by revenue, EBITDA and net new client assets,” may take the longest to implement but deliver the longest-term benefit,” Esclamado said.
RIAS shouldn’t be afraid to spend money to hire business development specialists, he said. “It’s critical to identify the right people to represent the firm, make calls and get new business,” he explained.
Firms should also apply to join referral programs offered by custodians. “RIAS can increase their leads, improve its branding and get in front of more prospects,” he said.
Firms should also create “a comprehensive and integrated marketing approach that will drive sustained growth,” Devoe & Co.’s founder, David Devoe, said in an interview with “It is a growth machine that is important — not a single silver bullet or charisma.
2. CASH FLOW
Carefully measuring expenses and revenue offers RIAS “a rich benchmarking opportunity,” Esclamado said. How owners are compensated is one aspect of cash-flow analysis that is often overlooked by sellers, he added.
For instance, many owners simply “take home a certain amount of cash” and don’t separate that amount into a base salary and proceeds from the business, Esclamado said. But that’s a mistake, he argued. “Potential buyers want to see a standardized compensation structure,” Esclamado said. “Normalizing comp is a big deal.”
Buyers also pay close attention to profitability, added Devoe. “Running a profitable firm not only creates more income for the owners, it demonstrates you are running a well-managed organization,” he explained.
Tackling risk is “the lowest hanging fruit for increasing firm value,” Esclamado said. In hiring advisors, firms should include noncompete and nonsolicit provisions.
Every firm should have a succession plan, Esclamado said. “Key-man risk is something every buyer looks at,” he noted. “Having a succession plan in place is essential.”
An independent board of directors made up of successful executives from outside the industry is another way RIAS can reduce risk, said Brent Brodeski, CEO of Savant Capital Management in Rockford, Illinois.