How to Value a Financial Advisory
Financial advisories provide a range of services related to personal finance, investments, and financial planning. They primarily help individuals, families, businesses, and institutions make informed financial decisions. As such, the financial advisory industry plays a crucial role in the economy. We can expect this industry to retain high demand for the next several years. This is ideal for those looking to buy, expand, or sell a financial advisory. Whether you are entering or exiting the financial advisory industry, it is important to understand how to value a financial advisory. This can help you take the next steps to increase the value of a financial advisory.
The best way to learn how to value a financial advisory is to receive a business valuation. During a business valuation, a business appraiser assesses the strengths and weaknesses of your financial advisory. Additionally, the expert determines the fair market value of a financial advisory. This information is crucial whether you are buying, growing, or selling a financial advisory.
Peak Business Valuation is a professional business appraiser. We are happy to provide you with a business valuation for a financial advisory. In addition, we can discuss any questions you have about how to value a financial advisory. Schedule a free consultation with Peak Business Valuation by clicking the link below!
How to Value a Financial Advisory
There are a variety of valuation approaches to use when valuing a financial advisory. At Peak Business Valuation, our appraisers often use the market approach and/or the income approach. These valuation methods calculate the value of a financial advisory from different perspectives. Business appraisers determine which method is best for your financial advisory firm during a business valuation. The method they use depends on various factors such as the purpose of the valuation, the size of the financial advisory, the nature of the business, etc… In some cases, business appraisers use a combination of valuation methods to provide an accurate valuation.
Valuing a Financial Advisory Using the Market Approach
To understand the market approach, consider the real estate appraisal process. In real estate, appraisers look at recent transactions of similar properties in the same location. This helps them accurately determine the property’s market value. When using the market approach, business appraisers assess recent sales of comparable financial advisories on the open market. If the financial advisory is a private company, the expert refers to private transaction databases for relevant information.
Multiples for a Financial Advisory
One of the defining characteristics of the market approach is that it relies on valuation multiples. Valuation multiples are financial ratios that compare a financial advisory’s value to a financial metric. Some common financial metrics are cash flow, sales, and earnings. To find the proper valuation multiples, business appraisers use the appropriate NAICS or SIC code. Below, we highlight common valuation multiples for a financial advisory.
SDE (Seller’s Discretionary Earnings) Multiple for a Financial Advisory
- The SDE multiple measures the value of a financial advisory in relation to its seller’s discretionary earnings. Business appraisers multiply the SDE of the financial advisory by the multiple to determine a fair market value. This multiple is common when valuing a financial advisory.
EBITDA Multiple for a Financial Advisory
- The EBITDA multiple assesses a financial advisory’s earnings before interest, taxes, depreciation, and amortization. This helps business appraisers determine the return on investment (ROI) that a financial advisory can expect.
REVENUE or SALES Multiple for a Financial Advisory
- The Revenue multiple calculates the value of a financial advisory based on its total amount of sales. Keep in mind, business appraisers at Peak Business Valuation typically rely on SDE and EBITDA when valuing a financial advisory.
Valuation analysts consider various factors to determine the most suitable multiple for a financial advisory. This can include the purpose of the valuation and the type of business transaction. To learn more, see Valuation Multiples for a Financial Advisory.
Valuing a Financial Advisory Using the Income Approach
Another common valuation approach for how to value a financial advisory is the income approach. This approach focuses on the future earning potential of a financial advisory. The income approach is based on the idea that the value of a business is driven by its ability to generate profits and cash flow. In addition, this valuation approach assesses the risks associated with a financial advisory. We list a few of these risks below.
- Client Retention. It is vital for financial advisories to build strong and lasting client relationships. This promotes steady cash flow and growth in profitability.
- Competition. The financial advisory industry is very competitive. To succeed, find ways to differentiate your financial advisory from competitors.
- Workforce. Financial advisories should hire individuals who have sufficient experience and education in finance. This improves the customer experience which has a significant effect on a financial advisory’s reputation.
- Financial Performance. To be profitable, financial advisories need sustainable revenue growth and healthy profit margins. This requires effective marketing and financial planning.
Methods to Value a Financial Advisory Using the Income Approach
The income approach comprises a range of valuation methods for valuing a financial advisory. The two most common methods are the capitalization of cash flow method and the discounted cash flow method. Both valuation methods assess a financial advisory’s value based on its income potential. Below we discuss how to value a financial advisory using the capitalization of cash flow method and discounted cash flow method below.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for financial advisories with stable histories. This method divides the potential future earnings of a financial advisory by a capitalization rate to calculate its value. The capitalization of cash flow method also assesses the risks associated with the business. These risks can have an impact on the return an investor expects to receive from a financial advisory. We list some of these risks above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for financial advisories with strong financial histories. It is also beneficial for businesses that have built a reliable forecast in the past. When using this method, the expert projects the business’s future cash flows over a 3-5 year period. The projected cash flows are then discounted using a discount rate rather than a capitalization rate. By following this process, business appraisers can determine the present value of a financial advisory.
Summary
At Peak Business Valuation, there are various valuation approaches our business appraisers may use for valuing a financial advisory. Generally, they rely on the market approach and/or the income approach. Understanding these valuation approaches gives you multiple perspectives on the value of a financial advisory. To know which method is best for your financial advisory, receive a business valuation. During a business valuation, a business appraiser can also help you identify the strengths and weaknesses of a financial advisory. Valuing a financial advisory is important if you are looking to buy, grow, or sell a financial advisory.
Peak Business Valuation, business appraiser, works with many financial advisories throughout the country. We are passionate about helping businesses succeed. As such, we are happy to provide you with a business valuation for a financial advisory. Peak Business Valuation can also answer any questions about how to value a financial advisory. Start by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Financial Advisory Firm, Valuation Multiples for a Financial Advisory, and Value Drivers for a Financial Advisory Firm.
