For independent investment advisor representatives, an RIA practice is an investment all its own. And just as with a client’s investment plan, when and how to sell an RIA can be a complicated decision, implicating your own long-term financial goals, your impressions of the current and projected market, and even your personal feelings about your clients, employees, and others who depend on your practice. Understanding the factors you need to consider and what you need to know if you’re considering selling an RIA practice can help you to make the best decision in determining when, how, and to whom to sell your RIA practice. This in turn can ensure that you maximize your return on investment and ensure the long-term stability and success of your practice.

Understanding The RIA’s Value

One of the biggest reasons for advisors to enter into independent practice in the first place is to maximize their return upon the eventual sale of the practice. Getting an accurate valuation, then, is perhaps the most important inquiry for advisors who may be thinking about selling. But valuing a practice isn’t necessarily as straightforward as simply assigning a multiplier to revenue or earnings before interest, taxes, depreciation, and amortization (EBITDA). In fact, a number of other factors are considered when valuing an RIA practice, including the growth potential of the business, the practice’s profitability, the structure of the firm, the risk associated with the acquisition, and the structure of the acquisition deal. 

Assessing an RIA’s Growth Potential

To evaluate the growth potential of an RIA firm, potential buyers will consider a number of sub-factors. These factors can include:

  • The source of the growth: RIAs that have experienced organic growth are more highly valued than those that have grown through acquisition or mergers, as the growth is seen as more sustainable. 
  • The historic rate of attrition and addition: a purchaser will look at the practice’s historic client acquisition versus attrition of existing clients from the firm to evaluate the firm’s potential for future growth.
  • The client demographics: the demographic makeup of a firm’s client base will impact its future earning potential and play a role in the valuation of future revenue streams. Factors like a firm’s client diversity, regional strength and growth potential, and the extent to which a firm’s revenue is spread out as opposed to concentrated in only a few clients are all important factors for firms looking to accurately estimate a firm’s potential future revenue streams.

How An RIA’s Structure Affects Valuation

In assessing the value of an RIA, an acquiring firm will evaluate the percentage of the practice’s business that is attributable to different activities. For a hybrid RIA and broker-dealer, revenue derived from the business’s fee-based advisory practice is seen as more sustainable, and therefore more valuable, than commissions earned as a broker-dealer. A higher multiplier is placed on an RIA’s fee-based business than on its commission revenue. RIA practices that earn at least 50% of their revenue from fee-based services are therefore more highly sought after by regional and RIA aggregator firms.

Profitability And Risk

In appraising an RIA practice’s profitability, an acquiring firm can apply a number of analytical models, including assigning a multiple to historic revenue, EBITDA, or discounted cash flow. What this multiple is, however, will depend on the risk associated with the acquisition. Factors considered in assessing risk include the assets under management (AUM) of the firm, the firm’s investment in personnel and technology, the commitment of the principals to continue working with their existing clients, and the firm’s investment philosophy, will all be considered in making this determination.

A Cultural Fit Is Important

In determining whether, and to whom, to sell an RIA practice, owners should give careful consideration to factors beyond the pure dollars and cents of a given transaction. Ensuring that an RIA’s partners and employees are on board with a given acquisition can be nearly as important as client retention in creating a successful new relationship. Selling a business doesn’t have to mean an advisor retires — if an acquisition is structured as an equity investment, advisors can keep working with their clients in the capacity that suits them best, either in an advisory role, as a rainmaker, or by focusing on a smaller segment of their practice.

In determining whether a firm’s culture will be a good fit, look to the firm’s investment philosophy, client base, and commitment to principles like diversity, ethical investment, and transparency. The intangible factors can play as much of a role in future success as tangible ones, and they are important to understand. Working with a knowledgeable partner, like the experts at Terrana Group, can help to make the transition easier and ensure the right fit between RIA and buyer.

Want to Keep the Conversation Going?

Getting ready to sell your RIA practice but not sure where to start? All of us at Terrana Group welcome the opportunity to consult with you to determine the right platform for you going forward — one that satisfies your long term objectives and is also best for your clients!

Over the course of nearly 30 years, we have helped facilitate thousands of professional placements for Advisors, with client assets transferring exceeding $67 billion dollars. We have completed placements in most every major city throughout the United States, while building deep relationships with the advisory world’s most sophisticated and notable firms — including Wall Street brokerages, most Regionals, Boutiques, Banks, Independent Broker Dealers, RIAs and Custodians. We have a broad knowledge of the deals that are currently being offered and will ensure that you are being presented with the offer which will be best for you.

Confidentiality, professionalism, and respect are protocol to our practices and beliefs; we handle each and every step of the placement process with complete communication, keeping you informed while making the process smoother from beginning to end. 

We are proud to always be considered as a great asset by our clients because of our proven expertise, many years of knowledge, and acute attention to detail. Financial Advisor Recruiting Services are not all created equal; we guarantee that the TG experience for clients and candidates is always world class.

We are based in Chicago, with a nationwide reach. Let us know you are interested by contacting us today. To get the conversation started, email info@terranagroup.com or give us a call at 312.655.8380 today.