How to Value an Asset Management Company - Complete Breakdown

Selling your asset management company can be one of the most significant business decisions ever, but determining its true value is critical to ensuring you get the best deal.

The process involves much more than simple financials; it requires a deep understanding of market trends, company assets, client portfolios, and future earning potential.

Knowing how to value an asset management company comes in handy, whether as part of an exit plan or if you’re aiming for long-term business growth.

In this article, we’ll discuss various industry-specific valuation techniques to help you arrive at an accurate value for your business.

TL;DR - How to Value an Asset Management Company

There are three methods for asset management company valuation, which we’ll discuss in detail in this article:

Prepare the necessary documentation
Choose a valuation approach
Complete the valuation document

Accurate valuation requires expertise and research. That’s why it’s often best left to the experts.

At Exitwise, we help you assemble a team of top M&A professionals, from investment bankers to assessors, who will maximize your asset management company’s value. Let’s connect and discuss your needs so we can arrange the best experts for your business.

What is an Asset Management Company?

An asset management company manages the assets of other businesses and individuals by:

Investing, buying, and selling assets on their behalf
Reducing and assessing risk in financial decisions
Ensuring compliance with regulatory standards
Growing their financial portfolio

Companies and individuals with a high net worth need these services to diversify their investments and ensure their financial decisions are well-timed and sound.

Valuation Considerations for an Asset Management Firm

When conducting an exit valuation, assessors typically examine cash flow, costs, and debt (among other things). However, value is determined beyond the numbers on your financial statement.

You also need to pay attention to the following valuation drivers:

Quality of client base: A recurring client base increases a company’s perceived value, as it suggests credibility and trustworthiness.
Business scale: The bigger the company, including the number of employees and total assets under management, the higher the value.
Source of revenue: Firms that charge a fee are often more expensive (therefore gaining higher profit margins and, ultimately, a higher valuation) than those earning through commissions.
Business tenure: A mature company growing slowly but steadily is typically valued higher than a fast-growing startup.
Range of services: The more sophisticated or specialized your services, the higher the valuation.

How to Value an Asset Management Company

Here’s a typical outline of how the valuation process should go:

Prepare the necessary documentation: Put together all paperwork pertaining to your finances, operations, and management.
Choose a valuation approach: In the following section, we’ll discuss the three valuation methods you can choose from (income-based, asset-based, and market-based). Which one suits your business depends on factors like financial complexity, profitability, and assets.
Complete the valuation document: This is a comprehensive report that discusses the value of your business, the methodology utilized to arrive at the valuation, and the documents to support your results.

Valuation Approaches for Wealth Management Firms

There are three main approaches to asset management company valuation. Applying the one most suitable for your business is crucial for arriving at an accurate valuation.

Need a quick value estimate? Use our valuation calculator. This will give you real-time estimates based on your firm’s existing data.

Now, let’s look at the three approaches:

1. Income Approach

This valuation approach projects a firm’s potential for profitability by analyzing cash flow, risk, and opportunities.

Two models fall under this approach:

Discounted Cash Flow: Analyzes income by looking at free cash flow (revenue generated less capital expenditure) against an appropriate rate of return or discount rate. The higher the risk, the higher the discount rate, and lower the projected value.
Single Period Capitalization: Predicts growth rate and annual income over a specific period by capping projected profitability based on expected growth rate and risk factors.

While the income approach does not rely heavily on historical cash flow, it does need to take historical data into account for sound projections.

Best for: Applies best to larger, more established firms with a robust cash flow history.

Pro: Highlights revenue and profitability, two of the biggest concerns affecting buyer decisions.

Con: A huge portion of the valuation is based on predictions of future earnings, which means a slight miscalculation of profitability can heavily affect valuation.

2. Market Approach

This approach values a company based on the recent sale price of similar businesses. Essentially, it is a method of comparison.

You can determine your company's worth by using market data from recent transactions related to publicly traded companies and applying multiples like the price-to-earnings ratio and EBITDA (more on multiples in the following section).

Best for: Best suited for small to medium companies and when sufficient market data is readily available.

Pro: Value calculations are often more accurate since public data is verifiable.

Con: It can be challenging to find comparable companies for unique niches; even similar firms have unique differences that can impact their value.

3. Asset Approach

This second approach determines the fair market value of your business by looking at your total assets minus liabilities.

Asset-heavy companies do well to use this approach to maximize business value.

However, wealth management companies don’t have assets like construction or tech companies do. Their assets are their clients – and they don’t stay in the office very long, if at all.

These companies have what are called intangible assets. These include your customer base, alliances with other institutions or businesses, and name or reputation.

While this approach may provide some insight into your company's value, it’s not the most suitable method for valuing a business offering financial services.

Best for: Companies that use the asset-based approach are often asset-heavy, like businesses with patented technology or infrastructure.

Pro: Calculating value is very straightforward yet flexible. You have some leeway to decide which assets to include in the valuation.

Con: Determining a company’s value based on its assets can result in a much lower valuation than what it's actually worth, especially since it doesn’t account for growth and revenue potential.

Asset Management Industry Valuation Multiples

Multiples are metrics applied to specific financial measures (like earnings) to “price” a company. They are often used for Rule-of-Thumb methods – valuation shortcuts that produce an average value.

The following are the most commonly used multiples when valuing an asset management firm:

Enterprise Value to Assets Under Management (EV/AUM)

This multiple measures the total business value relative to the value of assets under a firm’s portfolio.

Asset managers are typically paid a flat fee or percentage of AUM, which also translates to their revenue. Therefore, calculating EV/AuM provides a quick view of a company’s profitability.

The rule of thumb is that valuation is 2% of total AUM, but some studies suggest it may fall within the 1 to 3% range.

Enterprise Value to EBITDA (EV/EBITDA)

First, let’s define EBITDA.

The term stands for “Earnings before interest, taxes, depreciation, and amortization”. It’s a metric widely used to measure a company’s performance – the health of its cash flow and the efficiency of its operations.

EV/EBITDA, also called the enterprise multiple, is commonly used as part of M&A accounting and valuation because it focuses on aspects related directly to the health of the business, such as debt.

This multiple is essential for the buy side since they would want to know how much debt they’re about to assume and whether the company’s prospects for profitability outweigh that debt.

In most cases, a multiple of 4x is applied for private companies, although the multiple may be as high as 8x for public corporations.

Enterprise Value to Revenue (EV/Revenue)

EV/Revenue compares a company’s enterprise value with the total revenue generated over a specific period.

This multiple is typically used to value firms with low or negative profit margins, such as startups, during a period of high growth (meaning the focus is more on expanding the business instead of making a profit).

Generally speaking, a higher EV/Revenue multiple suggests that a company’s potential for profitability looks promising.

A mean multiple for EV/Revenue ratio averages around 2.6 to 4.9, depending on the industry.

Price to Earnings (P/E)

Another commonly used multiple is P/E, which determines a company’s share price in relation to its earnings per share.

The average price-to-earnings ratio is 20 to 25. The lower the actual figure is for your business, the more profitable it is.

To fully appreciate the resulting valuation, it’s best compared against other factors that affect stock price, such as the valuation of other similar firms and current market mood.

While these can be a good starting point, relying on exit multiples entirely when looking to sell your business comes with disadvantages:

Rule-of-thumb valuation shows only a speck of the full picture: Averages often fail to capture the nuances of a business’s story. For instance, since multiples rely solely on tangible assets, resulting values may not accurately represent a company's worth.
Multiples are useful but limited tools. While multiples have a place in valuation, they must be used with an understanding of other valuation drivers, their limitations, and how these calculations vary.

Frequently Asked Questions (FAQs)

Let’s answer some more questions you may have about this topic here:

How Does Revenue Impact the Valuation of an Asset Management Company?

Revenue is a crucial valuation driver. It affects not only the perceived value of a business but also the “price” that investors or buyers would be willing to pay for your company.

Whether you’re determining your firm’s value through equity models like the discounted cash flow method or using a shorthand multiples approach, revenue is crucial for projecting profitability and overall business health.

The higher the revenue (historical or projected), the higher the company’s value.

What Role Does Assets Under Management (AUM) Play in Valuing an Asset Management Business?

Assets under management (AUM) refers to the total pooled assets being managed by a wealth management company.

This is another vital component in valuation because most firms charge a flat rate or fixed percentage per AUM, which then translates into their revenue.

The higher the AUM, the higher the firm’s earnings and valuation.

What Risks Should Be Considered when Valuing an Asset Management Firm?

To accurately value an asset management firm, you must consider any risks that may impact forecasted valuation, such as:

Market volatility: Changes in market mood and industry issues can negatively affect the valuation process.
Insufficient market data: Relying on only one source of pricing data can lead to distorted valuation. The better way is to diversify both your sources and the methods used for determining value.
Limited valuation competencies: Accurate valuations require expertise, market knowledge, and extensive research. This is why it’s essential to employ strategies tailored to your specific business and built on in-depth industry knowledge.

The importance of working with industry experts, therefore, can’t be overstated in this case. At Exitwise, we can help ensure you have the right people on board. Explore our process to learn more.

Conclusion

Knowing how to accurately value your asset management business is vital to maximizing its sale. It ensures you get the most out of your exit strategy while being fair to potential buyers.

For your type of business, it’s best to choose between the income and market valuation approaches, as these demonstrate your profitability, business potential, and market value.

However, once you’ve selected the appropriate valuation model, the work has just begun. You need industry experts to guide you through this process, from deliberation to a successful sale.

Get in touch with us today, and we’ll help you pick out M&A experts who can make sure that happens.