5 STRATEGIES FOR IMPROVING BUSINESS VALUATIONS

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1 5 STRATEGIES FOR IMPROVING BUSINESS VALUATIONS INSIDE: Learn key factors in a business valuation and how small changes to your book can add up to big improvements in market value.

2 A savvy home seller might invest $2,000 in a few simple kitchen upgrades to realize an additional $10,000 on the home s selling price. Often, minor adjustments are all it takes to drastically improve the appeal of a home, and the same goes for selling your book of business. By making small, manageable changes to your book or the way you do business, you can help its market value for when it s time to sell. According to the Strategic Business Solutions team at LPL Financial, who perform more than 300 valuations per year, the following criteria are among the most influential in determining the market price of your book. Find out why and how they impact your valuation and what you can do to improve before it s time to sell. Client Lifetime Value When evaluating a book, buyers tend to appreciate clients who offer greater value over the lifetime of the book. A book of exclusively retirement-age clients offers few prospects for additional accumulation and growth, as they ll either be entering or in the distribution phase of their financial lives. Younger clients, on the other hand, are more likely to continue accumulating wealth for a longer period, thus growing their worth over time with the purchasing advisor. It s A Seller s Market Why Worry? Thanks to a prolonged bull market, advisors books have been steadily gaining value. Some who might otherwise have considered earlier retirement are instead biding their time while their worth increases. This has created a dearth of supply and excess of demand. Buyers are lined up, eager to grow their practices through acquisitions. Eventually the tide will turn. With uncertainty in the regulatory environment, an aging advisor population, and the specter of the bull market ending at some point, an increase in supply is almost inevitable in coming years. Prepare for the day when you re ready to sell your book by maximizing its worth today. To assess the client lifetime value, our valuation team will compare your book against averages of all books we ve assessed. Your valuation will be influenced by whether it falls above or below the average. For advisors who ve received valuations at LPL: Average portion of clients over age 70 is 30% to 32% Average age of clients is 50 to 52 Ideally, you d want to fall below these numbers to get a higher valuation. All other factors being equal, a book with an average age in the 40s can command a higher price than one in the high 50s. If you have an older demographic among your clientele, one way to hedge against it is to engage in multigenerational planning. Reach out to the next LPL FINANCIAL 2

3 generation or clients heirs to begin forming relationships now that can potentially prove fruitful in the future. If you set up a trust, for example, you may have the opportunity to work with the children or grandchildren of your clients and potentially identify additional ways you can add value to their financial lives. Even a few of these relationships added to your book can help offset a higher average age. Adding new relationships to your book especially a younger demographic helps offset the outflow of assets with net positive inflows. Also, it helps demonstrate the relevancy of your service model. Your book is a living asset, and it should be continually refreshed. Asset Concentration Another important factor is how your clients assets are distributed throughout your book. Ideally, a relatively even portion of your total assets under management would be controlled by each stratum of clientele, but what s most important is that you re not top-heavy. Your valuation will assess the top 10% of your book and the portion of assets controlled by those clients. If you had 150 clients, what percentage of assets are controlled by the 15 largest accounts? Looking at the largest accounts helps determine the risk a prospective buyer would be taking should one or two of those clients not transfer. A particularly top-heavy book is a larger risk. On average, for the books on which we perform valuations, the top 10% of clients comprise 45% of assets. If your concentration is lower, your valuation will be higher. Conceptually, the goal is to manage a book with diversified assets and revenue. Buyers like to see books with high revenue per client and don t like to see a large set of a few clients who control a disproportionate amount of revenue. You can improve asset concentration in one of two ways: 1. Add more clients with accounts similar in size to the upper quartile of your book. 2. Terminate relationships with clients who have small accounts and with whom the relationship is no longer mutually beneficial. Often, advisors keep accounts on their books that have low value or that don t require ongoing service. Maybe the client opened a mutual fund in a brokerage account years ago, and you haven t been called to service it or even engage with the client in years. If you remove some of these dormant relationships from your book, you can reduce the number of your largest accounts that get factored into the top 10%, likely lowering the concentration and making the book more attractive. Recurring Revenue From sources like advisory fees and trails, recurring revenue the buyer can anticipate at regular intervals adds an appealing level of certainty to your book. Recurring revenue is so attractive that in a valuation, advisory assets are weighted at 2.3 to 2.4 times their revenue in price. For example, if you have $100,000 in advisory revenue, that will translate to $230,000 to $240,000 in terms of price, on average. By contrast, nonrecurring revenue is taken at face value $100,000 in nonrecurring revenue translates to $100,000 in price assuming this income can be replenished and is not tied to assets currently under any extending holding period requirement, such as annuities or alternative investments Adding more sources of recurring revenue to your book can dramatically increase its value. In cases where it s appropriate for your client, you may consider transferring some brokerage assets to advisory platforms. Additional sources of recurring revenue include unit investment trusts that have auto-renewals, annuities and mutual funds with trail features, and financial planning performed on a recurring fee, rather than on a transactional basis. Depth of Relationship Clients who invest most or all of their liquid net worth with you have a positive impact on your valuation. In part, this signifies a depth of trust in the relationship, which may make the clients more likely to transfer to the buyer. Additionally, the more insight you have into your clients complete financial lives, the more successful your advice is likely to be. The metric is almost a LPL FINANCIAL 3

4 barometer of client satisfaction. Given that you re selling relationships, happier clients who are fully invested are far more appealing than lukewarm clients who trust you with only a third of their total worth. Buyers also appreciate the stickiness of clients who trust you with a greater share of their worth. Often, it means they re engaged in a broader product set with you, and the cost of breaking the relationship would be higher. Directly ask your clients about accounts they have outside your purview. Explain that if you don t have insight into their complete financial lives, you ll be unable to advise to the best of your abilities because you won t know if your recommendations are counteracting strategies in other accounts. Certain technology platforms can help give you insight into clients outside accounts by housing them in one centralized location. With that knowledge, you can better understand what your clients are looking for and how you may be able to address needs they re currently meeting elsewhere. You can also expand your service offering to include products like insurance or estate planning services, which may help bring more of your clients total portfolios under your management. Technology Having a technologically advanced office is a boon for selling your book. While it isn t the most significant factor in a valuation, technology can be a significant selling point for buyers as it often indicates the practice is already built to scale. Tools that offer paperless processes and robust client relationship management (CRM) systems create ease in transferring a book to a new advisor. Another highly attractive feature is virtual meeting capability and use which widens the geographic area of potential buyers. If most of your business is already conducted through virtual meetings, a buyer from a different state could consider purchasing your book without having to plan frequent trips to your location. Begin incorporating new technology into your office, starting with things as simple as virtual document signing and building up to anything as complex as a new CRM. The more you can improve your technology now, the better your bottom line could be, and the more profitable you may be in the near term. When it comes time to sell your business, you ll be ready with an easily transferable book of clients who are accustomed to working digitally. Work with Us At LPL, our teams of experts can help you with every aspect of improving your valuation, from segmenting and assessing your book to incorporating more sophisticated technology into your practice, from generational wealth planning to expanding your product set. Our growth consultants will help you find and execute on opportunities to help maximize the value of your book of business. Expense Structure When looking to improve the value of their book, some people immediately focus on the expense structure of their business. While this would seem to make logical sense lower expenses make you more profitable, and more profitable businesses are more appealing in most acquisitions, buyers are buying your client relationships, not your business entity. Although cost structure is important in that it indicates current cost to service your clients, it s not necessarily reflective of cost to serve on the platform of an acquirer. Moreover, an extremely low cost structure can sometimes demonstrate a lack in investment in sustainability for example, working out of your home which, in some cases, can actually harm transferability and sustainability. This is assessed on a case-by-case basis. LPL FINANCIAL 4

5 Your Practice, Your Way However you envision the future of your practice or program, LPL s comprehensive support and broad range of innovative business models can help you build and grow your business, your way. LPL understands that independence doesn t have one single meaning. Whatever lens you view your independence through, LPL is here to support and provide clarity to that vision, whether you want to: Be an independent financial advisor at LPL with access to custodian services and a fully integrated platform to address the varied needs of your clients. Leverage the LPL Hybrid RIA model, which allows you to join LPL s broker/dealer platform while maintaining your Registered Investment Advisor (RIA) firm. Join an existing practice, bank, or credit union for established infrastructure, structured support, and access to new referral sources. Specialize in retirement plans and leverage tools and resources built by retirement plan advisors, for retirement plan advisors. Bring your entire practice or build one LPL offers customized clearing, advisory platforms, and technology solutions to help create efficiencies and scalability within your practice. LPL is committed to your success. Give LPL a call today at (888) , or visit JoinLPL.com, and put its capabilities to the test. Advisors should only recommend an advisory account if it is suitable for the client. Advisory accounts may not be appropriate for every client. Advisors need to understand that advisory relationships involve a higher standard of care than brokerage and typically require an ongoing duty to provide advice and monitoring. About LPL LPL Financial is one of the nation s leading financial services companies and a publicly traded company under ticker symbol LPLA. The firm s mission is rooted in the belief that objective financial guidance is a fundamental need for everyone. LPL does not offer proprietary investment products or engage in investment banking activities; this means advisors affiliated with LPL are not pressured or influenced by LPL to sell its products. Thousands of financial advisors nationwide are able to rely on the firm s tools and resources to help them provide financial guidance and recommendations to address their clients needs. For more information about LPL Financial, visit LPL Financial, a registered investment advisor, member FINRA/SIPC BD Tracking # (exp. 05/19) LPL FINANCIAL 5