Let’s start
with the end game in mind. What are
purchasers looking for? Generally,
purchasers are looking for RIAs that have the following attributes:
- $500 million of Assets Under Management (AUM), or more
- A consistent investment process that is applied consistently across all accounts
- Consistent internally-driven growth
- An efficient, technology-driven business model
- Profit margins (after a reasonable owner’s salary) of at least 20%
- No compliance issues
- 100% fee-based business model
If this does
not describe your firm now, what can you do now to head in this direction with
the time remaining? There are a few
operational steps you can take quickly that will make a big difference. First, migrate all of your clients to a fee
based business model and get rid of your broker/dealer affiliation. Being affiliated with a B/D detracts from
value. Adopt a standard, technology-driven
approach to customer reporting that can be leveraged across an ever-increasing
client base. Do not agree to any
customized client reporting, no matter how large the client. Adopt a consistent investment process that
utilizes as few CUSIPs as possible.
Also, limit the number of custodians you will work with to only 3 or 4. The fewer custodial relationships you must
manage and utilize for trading, the better.
Efficiency is the key in all of these areas.
Next comes
growth. Purchasers like to see a firm
that is consistently generating annual growth of 10% or more. This type of year over year growth takes a
structured and consistent marketing effort.
It is imperative that you tell your story to as many potential clients
as possible. Set goals for yourself, and
your other producers, for the number of meetings per week, month, quarter, etc. Use a firm-wide customer relationship
management (CRM) system to track and facilitate this marketing effort. The mere existence of this CRM system will add
value as it demonstrates a systematic approach to marketing that can be
transferred. Make sure your marketing
materials are up to date, this includes your website, your blog and your
collateral material. Develop a PR campaign
that positions you and your firm as the expert.
This can include speaking engagements, white papers, a blog, etc.
Lastly comes
financial and legal considerations. I
give this advice to every prospective client, regardless of industry; do not
run personal items through the company.
Whether these are family members on the payroll or your college alumni
association dues, take them off the company’s books. In many transactions, these personal expenses
are shown as proforma add-backs but many buyers to not give full credit to
these add-backs. This can be an
expensive adjustment; potentially losing 5-10X the expense amount in your
ultimate enterprise value. From a legal
standpoint, consider revising your client agreement so it is assignable. In every transaction, the buyer will want to make
sure that the existing client agreements can be assigned. If they are not assignable you may have to go
to every client and have them consent to the assignment before the transaction
closes. Maybe not a deal killer but
certainly a difficult and time-consuming closing item.
The value of an
RIA comes down to three main items; size, efficiency and growth. Value multiples vary over time but generally
firms with $100 million of AUM will trade for 4-5X cash flow (after the owner’s
salary) while firms with more than $1 billion of AUM could trade for more than
10X. Firms with an efficient operating
model that can be leveraged by a bigger firm or with a consistent growth track-record
or both; will move themselves up within their respective multiple range.
Alan D. Austin,
CFA
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