“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.

Advisor says: A couple of points from your recent columns on valuing an advisor’s business struck home for me. First, that rules of thumb are for “average” practices and do not take into account what could make one practice or book of business worth more than another of equal size. Because I believe that my business is better in a number of ways (which I won’t go into here) than my competitors’, I am glad to hear that those differences should be recognized by commanding a higher price when I sell my business down the road.

The second point is that value is determined by future potential – not past performance. (Where have we heard that before?) Which begs my question: if I do not intend to sell my business for at least five years, when should I have it professionally valued? I assume any valuation close to my intended transition date will be most accurate. So, should I just use those rules of thumb for now to get a general sense of value and be more precise later on?

Coach says: Knowing the current value of your practice is not crucial to a good transition plan – provided you are not relying on the sale of your business to fund all or part of your retirement lifestyle. If you are independently wealthy and receiving maximum value for your practice doesn’t really matter to you, feel free to delay valuation until you are ready to walk out the door permanently. In fact, if getting full value is not essential, you even could rely on those rules of thumb to get you close enough.

In my experience, however, most financial advisors do not fall into the “independently wealthy” category. While they have built great practices and enjoyed wonderful lifestyles due to above-average income, most have not created substantial wealth outside their business. Consequently, if most advisors want to maintain similar lifestyles in retirement, they need to maximize the value of their business before they exit.

For me, that is the crux of the argument in favour of early and regular practice valuations. From a financial perspective, how will you know when you are able to make the transition from your business to retirement if you do not have a good idea of the value you can expect to receive at that time?

A number of things can change in five years (citing your example), which will affect the value of your practice. Some are internal aspects of your business, which are within your sphere of influence. Some are external factors, which are not. All other things being equal, below are six internal factors and four external factors that can influence your valuation:


1. Net revenue. Boosting overall net revenue will increase the value of your business. To do that, you have to integrate business development with your pricing policy and expense control.

2. Recurring revenue. Practices with greater certainty regarding future income are less risky than those with unpredictable revenue, such as commissions. Increasing your percentage of recurring revenue leads to a higher valuation.

3. Business mix. Opinions vary for this factor. Some buyers think a narrow product mix presents opportunities to expand business within the existing client base. Others think that lack of diversification makes a practice too dependent on one or a few products, thereby increasing risk and reducing the price a buyer is willing to pay.

4. Concentration. Too large a percentage of your business being represented by one individual or family unit increases risk and reduces value.

5. Client demographics. A practice with an average client age of 55 is, generally, worth more than a practice with an average age of 70. If nothing else changes in your business, you could see its value decline over time as your clients age.

6. Business model. Increasing reliance on technology is changing how advisors operate. Up-to-date technology will be a plus; outdated systems will be a drag on value.


1. Fees within the investment industry. Overall, fees for products and advice are declining. Today, the industry’s average return on assets (a.k.a. turn rate) to advisors is hovering around 1%. However, many pundits (including me) believe this metric is headed much lower. That will reduce both revenue and practice valuation.

2. Increasing costs. No one will argue that the costs of managing your practice have not gone up over the past five years. And they are likely to increase by as much – or more – in the next five years for things such as compliance, systems, technology and staffing. Lower profit leads to a lower valuation.

3. Supply and demand. Currently, the demand for good-quality practices to buy far outstrips the number of good practices for sale, thus creating a “seller’s market” and higher prices. As senior advisors in our industry age by another five years, expect the supply of practices coming onto the market to increase. That, coupled with a much more diligent approach to analyzing practices for sale, will shift us toward a “buyer’s market,” in which prices typically decline for all but the best businesses.

4. Competition. I foresee practices increasing in size – through amalgamation, acquisitions, partnerships and corporate aggregation. Larger practices are less risky to buy than smaller ones, so they attract higher multiples. What once seemed like a large book of business could be comparatively small in a few years and, therefore, attract offers from only “financial buyers” looking merely to absorb more clients.

The opportunity to find “strategic buyers,” who typically are willing to pay more for a synergistic fit between your business and theirs, will diminish.

Looking at the lists above, there is hope that a current valuation of your practice will serve more than your succession or transition plan. A current valuation also can highlight areas of your business in which opportunity exists to maximize your practice’s value. By understanding what contributes to a premium or a discounted value, you can take steps to improve the chances your retirement lifestyle will be as you hoped. Periodic reviews every year or two will help you keep track of your progress.


Because I deliver a number of valuations each year, I declare my obvious bias. However, here is my take on who could calculate your practice’s valuation, ranked from least appropriate to most:

You. Your view is tainted by the sacrifices and effort you made in building your business. Buyers don’t care about these factors. All they want to know is “What’s in it for me?”

Typical cost: $0 (plus the value of your time). Review cost: Same.

Your accountant. The role of your accountant is to minimize the value of your business so you pay the least amount of taxes. When you are selling, you want to demonstrate the greatest value in order to maximize your payout.

Typical cost: Accountant’s hourly rate, times hours spent. Review cost: Same.

A chartered business valuator (CBV). CBVs are well trained in valuing things such as inventory, customer contracts, accounts receivable and working capital – most of which don’t apply to an advisory practice.

Typical cost: $10,000-$15,000. Review cost: negotiable, depending on the interval.

Financial advisory practice valuation specialist. These professionals understand the nuances of what contributes to the value of a financial advisory practice. In addition, someone regularly active in this field knows the current state of the market and may be able to assist in both finding the right buyer and negotiating a deal.

Typical cost: $3,500-$7,500. Review cost: negotiable, depending on interval.

The typical cost of finding a buyer and negotiating a deal is 3%-5% of sale price.

Regardless of whom you choose to do your valuation, my parting advice is summed up in my “management mantra”: “Manage your business today as if you intend to run it forever. But always be prepared to sell it – at any time, to the most qualified buyer, for the highest price.”

George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to george@marketlogics.ca. George’s practice-management videos can be viewed on www.investmentexecutive.com.

© 2017 Investment Executive. All rights reserved.