Financial Advisory Valuation Multiples
With steady growth in assets under management, financial advisory firms are becoming essential resources to businesses and individuals across the country. This trend presents lucrative business opportunities in the financial services industry. If you want to buy, grow, or sell a financial advisory firm, it is crucial to determine its fair market value. Understanding the value of a financial advisory firm enables informed decision-making and planning. For a quick and simple fair market value estimate, financial advisory valuation multiples are common tools.
This article explores the most widely used financial advisory valuation multiples. These tools are a helpful starting point if you need to understand a firm’s value. However, keep in mind that valuation multiples do not account for the specifics of every financial advisory. As such, results may be inaccurate or misleading. If you need to determine the precise value of your financial advisory firm, it is best to obtain a professional business valuation.
As a reputable business appraiser, Peak Business Valuation frequently works with financial advisory firms throughout the United States. We are happy to help you with a professional financial advisory firm valuation and answer any questions you may have. Get started today by scheduling your free consultation below!
What Are Financial Advisory Valuation Multiples?
A valuation multiple is a financial ratio used to estimate the fair market value of a business. These ratios are often based on data from industry sales trends and financial benchmarks. To select appropriate financial advisory valuation multiples, valuation experts compare similar firms that have recently been sold. To learn more, read our article on Valuation Multiples for a Financial Advisory Firm.
Common Financial Advisory Valuation Multiples
Peak Business Valuation often uses SDE, EBITDA, and revenue multiples to value financial advisory firms. Each metric offers a new perspective of a financial advisory’s value. Business appraisers frequently apply a mix of these multiples to provide a well-rounded estimate. Below, we describe each metric and provide the typical ranges for the financial advisory industry.
SDE Multiples for a Financial Advisory Firm
Seller’s Discretionary Earnings (SDE) represents the cash flow available to a single owner of a financial advisory firm. This method is particularly useful for smaller financial advisory firms where the owner plays a central role in daily operations. SDE is calculated by adding back one-time and discretionary expenses to net income.
Formula: Business Value = SDE × Multiple
Range: Financial advisory firms often sell at multiples between 4.50x and 5.50x SDE.
EBITDA Multiples for a Financial Advisory Firm
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a common measure of a business’s core profitability. It is especially useful for evaluating larger firms and comparing performance across the industry.
Formula: Business Value = EBITDA × Multiple
Range: EBITDA multiples for financial advisory firms typically range from 5.50x to 6.50x.
Revenue Multiples for a Financial Advisory Firm
Revenue multiples assess a firm’s value based on its total sales. While these metrics are a good indicator of a financial advisory’s market position, they do not provide insight on the business’s profitability. As such, revenue multiples are often considered less reliable than cash flow-based multiples like SDE and EBITDA.
Formula: Business Value = Revenue × Multiple
Range: Financial advisory firms generally transact between 1.50x and 2.50x revenue.
At Peak Business Valuation, we incorporate valuation multiples during a professional financial advisory firm valuation. We are happy to provide you with a reliable valuation or discuss any questions about valuation multiples. Schedule a free consultation with Peak Business Valuation today!
How to Value a Financial Advisory Firm Using Multiples
Since valuation multiples are based on industry averages, they do not account for the nuances of a specific financial advisory. As such, valuation experts conduct additional analyses of financial statements, economic conditions, and the unique characteristics of the firm. In many cases, business appraisers also apply weighted averages to balance financial fluctuations. For more information on the valuation process, see How to Value a Financial Advisory Firm.
Rules of Thumb for Financial Advisory Firms
SDE, EBITDA, and revenue multiples are considered rule-of-thumb methods for valuing a financial advisory firm. These methods can provide a general idea of what a financial advisory firm may be worth. However, rules of thumb should never replace a formal business valuation. If you want an accurate and defensible financial advisory firm valuation, it is important to connect with a professional business appraiser. Reach out to Peak Business Valuation if you have any questions!
Factors Affecting Financial Advisory Valuation Multiples
Financial advisory valuation multiples can be influenced by a wide range of factors. Identifying these variables can help firm owners identify the strengths, weaknesses, and opportunities of a financial advisory. Below, we highlight a few common elements that impact valuation multiples for a financial advisory firm.
- Assets Under Management (AUM): Firms with higher AUM typically generate higher fees and attract more clients. This leads to stronger financial advisory valuation multiples.
- Client Retention Rates: A strong history of client loyalty and long-term relationships indicates stability, supporting higher valuation multiples.
- Skilled Team: Financial advisory firms with certified professionals and a skilled support team are often more scalable and less reliant on the owner. This has a major impact on the value of a financial advisory.
- Technology Adoption: Implementing modern tools, like digital planning platforms or easy-to-use apps, helps improve the client experience. This can boost a financial advisory’s reputation and perceived value.
To learn more, read Value Drivers for a Financial Advisory Firm.
Conclusion
Applying valuation multiples provides a broad understanding of a financial advisory firm’s fair market value. While multiples are helpful for initial planning, they generally provide broad results that may not be reliable. The most effective way to determine the true value of a financial advisory firm is through a professional business appraisal. This process provides key insights on the firm’s strengths, weaknesses, risks, opportunities, growth potential, and more.
Peak Business Valuation is a professional business appraiser that values financial advisory firms nationwide. Whether you are buying, selling, or growing a financial advisory firm, we are here to assist! In addition, we can address any inquiries about the valuation process. You can schedule a free consultation by clicking the link below!
For additional insights, check out Financial Advisory Valuations and Valuing a Financial Advisory Firm.
