RIA Firm Valuations: What To Consider When Selling Your Firm

RIA Firm Valuations: What To Consider When Selling Your Firm

If you have been considering selling your RIA firm, several complexities are involved in determining and obtaining a fair valuation. Knowing what to consider when valuing your business is essential for getting the best price and terms while securing a prosperous solution for the involved parties. 

In this post, we explore key factors that must be considered when determining—and negotiating terms based on—a realistic valuation and price for your firm. Through careful consideration and understanding of these different elements, you can make informed decisions about your asking price and the terms of the sale.

This article discusses the following topics:

  • What are your current assets under management?
  • How much of your revenue is asset-based fees?
  • What is your asset-based fee schedule?
  • Will your current employees transition to a new buyer?

1. What Are Your Current Assets Under Management?

The main interest of a buyer will be the recurring revenues generated by your firm. Revenues are produced by asset-based fees that are reflected in the service agreements that your clients sign. 

The stability of the assets that produce the recurring fees will be a major concern for a potential buyer. For example, what are your current assets, and what percentage of your assets are invested in stocks, bonds, and alternative investments such as income-producing real estate?

2. How Much of Your Current Revenue Is Based On Asset-Based Fees? 

Average RIA fees can vary widely based on this. One of the most important decisions you can make is how to structure your firm’s compensation. The two most common options are fee-only and fee-based. However, it’s worth considering: What’s the difference between the two—and how could each affect your firm’s valuation?

Fee-only means that your firm charges only fees for its wealth advisory services. Conversely, fee-based means that your firm charges both fees and commissions. There are a few things to consider here. First, let’s look at some of the benefits of this model.

The main upside of fee-only compensation is that it aligns your interests with your clients. Because you are only paid based on fees you charge, there is no incentive for you to sell products that may not be in your client’s best interests. This alignment of interests is one of the key reasons why many RIAs choose to go fee-only. 

Commission-based compensation, meanwhile, can be a double-edged sword. The primary benefit might sometimes be potential cost savings over alternative compensation models. However, at the same time, this approach can lead to potential conflicts of interest: Advisors aren’t paid in proportion to the level of service that they provide. 

Moreover, advisor behaviors can become difficult to track and control when there is a significant disconnect between payment and performance. With potential risks on both sides of the equation, firms can use a commission-based model to set up protocols and systems promoting transparency and accountability.

Deciding whether a fee-based or commission-based model is best for driving the greater possible valuation of your RIA can be difficult. While commissions enable you to generate more immediate revenue, they can be seen as an upfront cost from potential buyers regarding eventual RIA value. 

In contrast, a fee-based model encourages an RIA’s long-term stability and has the potential to create higher valuations over time. This makes assessing your firm’s goals and objectives important when considering which payment structure works best. The choice you make could have far-ranging implications.

Wondering How To Choose the Best Buyer for Your Practice? We’ve Compiled a List of Tips

3. What Is Your Asset-Based Fee Schedule?

The payout percentage of a fee-based firm, particularly an RIA, significantly affects its valuation. As your practice receives money from clients continuously, a higher payout rate improves cash flows (which can go to repay debt or expand the business). 

At the same time, offering consistently high performance on investments with a higher payout percentage can draw more investors. This, as a result, can result in an increased valuation of your RIA. 

4. Will Your Current Employees Transition to a New Buyer?

Selling an RIA not only affects the future of the firm; it also involves making decisions about their employees’ livelihoods. That’s why it’s vital to assess upfront the number of employees who can transition successfully to the new buyer. 

Both firms may want to create a comprehensive transition plan outlining policies related to wages and benefits, setting expectations for job security. Ultimately, however, it is up to the buyer to decide how many employees they retain. This makes due diligence, done well beforehand, vital for both parties.

5. How Many Principles/Founders Will Transition to New Buyer?

A shift in ownership often coincides with personnel changes. So, it’s always important to work to ensure that both the principles/founders and the new owner move forward with mutual understanding, respect, and a common goal of success. Before anything is signed, identify the number of people who will transition as part of the sale.

Keep those details confidential, at the same time, until all parties have reached an agreement. After this agreement is finalized, everyone involved in the transition should receive an official notification concerning their role.

6. What Percentage of Assets Do You Expect To Transfer to the New Buyer?

RIA firm valuations

Lastly, planning and determining the percentage of assets expected to transfer to the new buyer is essential. Factors such as quality client service, reputation, and effective marketing can affect the number of shared assets. Generally speaking, if you’ve established a quality practice and provided clients with consistent value, most may be open to continuing to work with the new buyer. 
So, it’s vital to ensure that both parties expectations surrounding asset transfer metrics are clearly defined before closure. This is often the recipe for ensuring a successful transition. ViaWealth LLC is a firm looking to grow with yours, not in competition. Schedule a free meeting to find out more.

ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.

More about the author: Reid Larson

Reid is the Managing Member and Founder of ViaWealth LLC.

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