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.

Financial Planning - - CONTENT - By Charles Paik­ert

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.


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.

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