Unlike other financial service firms, the attractiveness of an RIA business depends on several factors that can shift dramatically with the wrong approach.
That’s why RIA valuation can be challenging. But, once you understand what impacts the result, you should be able to maximize your RIA firm’s valuation.
In this blog post, you’ll learn how to make informed decisions and protect your business’s true worth, all while bringing the right consulting experts by your side.
Below, we discuss in detail how to value your RIA business, covering the following key aspects:
These steps require working closely with professionals such as investment bankers, M&A attorneys, wealth advisors, accountants, and financial experts. Contact our team at Exitwise, and we’ll help you connect with the best industry experts for an accurate and smooth valuation of your RIA firm.
Your RIA firm’s value is tied to:
Potential buyers first look at how much money it can make and how stable or risky that income is.
Here are five critical factors that influence RIA exit valuation:
This metric shows the total value of the assets your firm manages on behalf of clients.
Buyers often use a multiple of the AUM to estimate your firm’s value. Here’s how they interpret it:
However, the type of clients and your services also affect how AUM is valued.
Consistent, recurring revenue is highly regarded in the RIA world. Here’s why:
In short, you tend to be valued higher if you have a higher percentage of recurring revenue.
Buyers assess client demographics, focusing on age and average client size.
Younger clients count as potentially long-term assets because they can grow their wealth. Also, larger clients typically generate more revenue.
However, if your client base is aging or overly concentrated in a specific group, it may:
During prospecting, buyers look at your operating expenses closely to see if your firm can maintain or improve profitability.
They’ll particularly want to know how much revenue you’re left with after covering expenses because that defines your firm’s profitability.
If they see higher profit margins, they’ll think your firm is well-managed and operates efficiently. If the margins are low, they’ll drag down your valuation even with a large AUM.
A firm growing its AUM and revenue over time is more appealing to buyers. That’s because this ascendent trend shows historical growth and suggests future potential.
So, whether through gaining new clients or expanding existing relationships, strong growth prospects can significantly boost valuation.
High client retention suggests that your firm has strong relationships with its clients. Buyers see this as a sign of stability and predictability.
Since retaining existing clients is much cheaper than acquiring new ones, your RIA firm will be more valuable if it has strong retention.
A strong, well-known brand with a good compliance history is seen as low-risk, which can increase valuation.
On the other hand, firms with compliance issues or a negative reputation may be viewed as risky, which can lower their valuation.
RIA valuation methods can focus on revenue, profitability, or market comparisons. Different methods use different exit multiples to provide insights into your business's worth.
Below is a breakdown of the most common RIA valuation multiples and RIA firm valuation methods to help you understand which one might fit your situation best.
This method looks at your firm’s annual revenue and multiplies it by a specific factor. The exact multiple depends on things like:
Generally, you can apply a higher multiple for recurring revenue streams from management fees and a lower one for one-time project fees.
While this method is straightforward, it doesn't consider profitability. Firms with high revenue but low profits might get overvalued using this approach.
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, looks at how much profit your firm generates before those financial factors are considered.
Buyers prefer this method because it shows your firm’s operating performance.
The EBITDA multiple for RIA firms typically ranges from 7x to 9x, depending on factors like growth, client retention, and profitability.
The DCF method looks at your firm’s future cash flow and discounts it back to its present value. Since it’s a more detailed approach, it requires financial forecasts, which makes it complex but accurate.
DCF is useful for larger firms with strong, predictable cash flow. Buyers like it because it accounts for long-term profitability rather than short-term gains.
This method involves comparing your firm to similar RIA firms that have sold recently. The value is based on the multiples those firms were sold for, whether calculated by revenue, EBITDA, or both.
Market comparables are helpful when there are many recent sales of firms like yours, as they give a good benchmark. However, the market can fluctuate, and if there aren’t many recent transactions, it might be hard to get a reliable estimate.
While this isn’t a separate valuation method by itself, it’s an option you can choose if you want an independent, unbiased, and professional analysis of your firm’s worth.
These services can use a combination of the valuation methods from above, which is why buyers find their results particularly accurate and credible.
Want to eliminate the guesswork of choosing the right RIA valuation method and ensure the process is handled professionally? At Exitwise, we can connect you with the right experts to handle your valuation.
Valuation calculators give quick estimates based on basic financial details. They are great for getting a rough idea but often don’t cover deeper factors like growth and client loyalty.
While not exclusively an RIA calculator, our Exitwise valuation calculator is simple to use and offers you a valuable starting point.
Designed to gauge a business's value, it's best for smaller firms or initial estimates. A professional valuation is still required to provide a more accurate and detailed picture for larger firms with complex finances.
When valuing an RIA firm, understanding the factors that can significantly impact the result is key to protecting its true worth. Here are five such typical risk factors:
You don’t just want to sell but to sell for the most money. For that, you need to make your business irresistible to buyers. Here are some tactics that will help you do that and maximize the business value:
Before you initiate your RIA firm’s valuation, check out the answers to these frequently asked questions:
The valuation of RIA firms typically ranges between 7x to 9x EBITDA, with some exceptional cases reaching up to 20x EBITDA when agreements include growth incentives post-sale. RIA businesses are particularly attractive due to their steady cash flows and potential for organic growth.
RIA valuations focus on recurring revenue and AUM, while other financial service firms may emphasize transaction volume or product sales. Client retention and regulatory factors also play a larger role in RIAs, making them more dependent on stable income streams and long-term relationships than other financial firms.
Standard add-backs in RIA valuations often include the owner's salary above market rate, one-time or non-recurring expenses, personal expenses (like travel or meals charged to the business), bonuses, and discretionary expenses not essential to daily operations. These adjustments help reflect the firm’s true operating profitability.
To get a high valuation and make your RIA firm attractive to buyers, you must:
Partnering with M&A experts can make all the difference in this process, and our team is ready to help you find the best M&A advisory services.
Whether you need guidance through valuation, company preparation, or the entire selling process, we help you get it from the best in the industry.
Learn more about how Exitwise guides you to maximize value and ensure a successful RIA business exit.
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
