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The following article discusses how to value a Registered Investment Advisory firm (RIA) prior to taking it to market.
Who Performs A Valuation?
RIA valuations are typically performed by one of three parties:
The M&A Advisor
A Third-Party Specialist
The Seller Themselves
Although many sellers attempt to perform their own valuations, we strongly recommend against this. Self-representation can lead to inaccurate valuations that give sellers a false sense of how much their company is worth. It also opens the door for savvy buyers to talk them out of millions of dollars when it comes time for negotiations.
RIA Transaction Payout Averages 2023: Self-Represented vs. Professional Representation
With that in mind, we must be clear that the following article is not meant to encourage owners to attempt a self-valuation. Our goal is to help sellers get up to speed on how to value an RIA so they know what to expect and what questions to ask as they get started. We highly recommend that sellers speak with an M&A advisor before taking their company to market.
How To Value an RIA: Step-By-Step
The process of valuing an RIA happens in essentially three steps:
The following sections list each of these steps in greater detail and include examples to demonstrate to readers how to value an RIA in the real world.
1. Gather Financial Information
Once sellers decide that they want to start looking into the possibility of selling their RIA and have determined their overall goals for the transaction, the first step in the process is to collect several key documents that illustrate the company’s overall financial health. These documents include:
How To Value an RIA: Key Documents by Type
Document Type | Examples | Purpose in M&A |
Financial Statements | Income Statements, Balance Sheets, Cash Flow Statements, Projections for Revenue, Expenses, and Client Growth | Establish the historical profit and cash flow trends of the business, and identify the level of debt |
Client Information, Satisfaction, & Contracts | Client lists, Client Retention, Churn Data, Demographic Information, Fee Structure Information | Identify key revenue drivers and assess client concentration & demographics |
Assets Under Management | AUM Growth Reports, Asset Class Breakdowns, AUM Concentration Reports | Track the historical asset growth of the business by measuring both organic and inorganic acquisitions |
Compliance & Regulatory Documentation | Compliance Policies & Procedures Manual, Annual Reviews, Code of Ethics | Demonstrate the company’s history of managing compliance risks and adherence |
Marketing Data | Client Acquisition Strategy, Marketing Materials, Client Onboarding Information | Determine the success of the company’s client acquisition strategy |
Operational Documents | Organizational Chart, Employee Agreements, Succession Plan, Vendor Contracts | Evaluate the expertise and skill of the current management team as well as potential succession issues |
Risk & Liability | E&O Insurance, Cybersecurity & Data Protection Policies, Litigation History | Identify any legal liabilities or standing litigation that might affect the buyer’s risk profile |
Sellers should be prepared to have their M&A advisor or a third party (usually provided by the advisor) review these documents in detail. However, it never hurts to have an internal team analyze them first, as having multiple valuations can help teams triangulate a more accurate valuation of the company throughout the M&A process.
2. Determine Valuation Methodology
There are three traditional valuation methods for RIAs.
Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA): The total profits of the company with interest, taxes, depreciation, and amortization added back, showing the future value of the business to prospective buyers.
Revenue: The total earnings of the company prior to subtracting operating expenses. Although it’s used far less frequently than EBITDA, revenue is sometimes preferred by smaller companies that have a higher cash burn.
Assets Under Management (AUM): The total value of assets owned by the RIA. This method is also less popular than EBITDA but is sometimes used by companies with larger investment portfolios, such as wealth management companies.
EBITDA is by far the most commonly used valuation methodology for RIAs due to its ability to forecast a company’s future profitability. However, certain types of companies may prefer other valuation methods. As mentioned above, AUM valuations are particularly popular with wealth management companies. Some RIAs with non-AUM or commission-based revenue might prefer a revenue-based valuation since an AUM model wouldn’t capture their business model. The reality is that capturing the business model is paramount to a proper valuation. The example RIA in the table below compares three methodologies used for the same small firm to show how they affect the valuation. For each method, we’ve included ranges to demonstrate the high and low ends of the valuation. | Valuation Methodologies in M&A, 2024 |
RIA Valuation Methodology
EBITDA | Revenue | AUM | |
Amount | $1,260,000 | $4,541,000 | $88,133,216 |
Multiple/ Percentage | 6.1x | 2.9x | 2% |
Total Valuation | $7,686,000 | $13,168,900 | $1,762,644 |
As you can see, the revenue method benefits the sample agency best because a high operational spend ate into their EBITDA valuation and a relatively low amount of assets effectively prevented an AUM valuation.
This is not the final valuation, however—the final amount depends on additional factors, including the current market.
3. Evaluate Market Conditions
The final step in how to value an RIA is determining whether now is the right time to sell. M&A advisors do this by looking at a variety of factors, including:
Historical deal data
Interest rates
Inflation
Regulatory changes in the industry
The RIA market’s current market share within their sub-industry
Evaluating market conditions is considered more of an art than a science. For example, let’s take a look at the value of the same small example RIA in today’s market.
Overall, the M&A market for RIAs has been experiencing mild to moderate gains in deal volume and deal value, suggesting that 2024 will likely be a good year.
RIA Deal Value and Deal Volume, H1 2020 - H1 2024
In addition, the Federal Reserve has finally started issuing mild tax cuts as of Q3 2024, which suggests a future bump in M&A deal activity. We’ve also noticed the shape of deals changing over the last few years, with cash payments taking up an increasingly larger portion of payouts. This trend emerges in stark contrast to most other industries in M&A, where equity has increased YoY over the last decade.
2022 | 2023 | 2024 (Projected) |
 |  |  |
These factors suggest that our sample RIA is not only likely to see an above-average valuation, but is also likely to earn a higher payout upon closing in the year to come. How much higher, however, depends on the marketing process, due diligence, and negotiations as handled by your M&A advisor.
How To Value an RIA: Consult an Advisor
The process of an RIA valuation looks complex on paper, but the reality is even more complicated. It is especially for this reason that we recommend working with an expert who has experience selling RIAs. The teams at Sica | Fletcher have worked with thousands of clients to bring RIAs to market and are available to discuss a possible valuation when you are ready.
If you would like to speak with our team directly, reach out here or use the contact information below.
About Sica | Fletcher: Sica | Fletcher is a strategic and financial advisory firm focused exclusively on the insurance industry. Founders Michael Fletcher and Al Sica are two of the industry's leading dealmakers who have advised on over $16 billion in insurance agency and brokerage transactions since 2014. According to S&P Global, Sica | Fletcher ranked as the #1 advisor to the insurance industry for 2017-2023 YTD in terms of total deals advised on. Learn more at SicaFletcher.com.
Contact: Mike Fletcher
Managing Partner, Sica | Fletcher
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