Potential Factors that Impact the Value
of an Asset Management Firm
August 2013
Author: Peter N. Thacker, CPA/ABV/CFF,
ASA, CFE, Business Valuation & Forensic
Services Manager
I was recently discussing the valuation of
an asset management firm with an
associate, when he responded (jokingly)
that the firm could increase its value
by increasing its revenues and decreasing its expenses.
If only it were that easy. When valuing an asset
management firm, one often hears rules of thumbs
bandied about: 1.5 time’s historical annual sales or 3 to
5 times sellers’ discretionary earnings. Unfortunately,
two firms that manage the same amount of assets and
have identical revenues, expenses, and net income, may
not be worth anywhere near the same amount to a
potential buyer.
All other things remaining the same, the following
can have a significant impact on the valuation of an
asset management firm:
›
Transferability of client relationships – If a firm has
relied on one or two key employees to achieve its
historical success, then there is a significant risk that
the client base could follow those individuals if they
were to leave the firm. This situation forces one to
pay particular attention to whether it is the key
personnel who possess the client relationships or
whether these relationships have become
“institutionalized” and transferred to the firm.
›
Average age of client base – If a firm’s client base is
older, then that may suggest a lower value for the
firm because an older client base will be more likely
to withdraw funds rather than continuing to
contribute additional assets to the firm to be
managed. This risk factor can be alleviated if the firm
is able to successfully transition the management of
a family’s wealth from one generation to the next and
continue to maintain the relationship with the
younger generation. (However, see the additional
comment regarding “average client life”).
›
›
Average client life – A firm that is able to
maintain relationships with its clients for longer
periods of time will be less risky than one in
which there is more turnover, which results in
the firm having to expend more resources
acquiring new clients.
›
Capacity – A company whose advisors have
the capacity to take on more clients will have
more opportunity for growth than a similar firm
whose advisors are overburdened with their
current client base. If a company’s advisors are
already at capacity, then the company will need
to hire additional advisors to support future
growth and the resulting uncertainty regarding
new advisor performance results in more risk
for the firm.
Due to these factors and a myriad of others, one
should be careful when utilizing rules of thumbs to
value asset management firms. A proper valuation
analysis will consider all relevant factors when
trying to place a worth on your asset management
firm, or one you hope to acquire. For more
information regarding the valuation of your asset
management firm or other financial advisory
practice, please contact Peter Thacker
804.565.6031 | [email protected].
Stay in touch ›
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under management are heavily concentrated in a
small number of clients, then this factor can result in
more risk, because the departure of just one client
could have a material impact on the company’s
operations.
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