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RIA Lawyer Update: How and When to Value an RIA Firm?

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Tuesday, March 6, 2018.

Erwin J. Shustak, Esq.
619.696.9500 ext. 109
[email protected]

For those entrepreneurial enough to form, own and operate a successful RIA firm, while there is great satisfaction in being the “captain of your own ship”, most RIA owners really have no idea of the market value of their firms.   Typically, RIA owners wait until there is a potential sale or other transaction, either planned or forced, (due, for example, to death, internal disputes between owners or some other, unplanned event) before ever seeking and obtaining a valuation for their firms. 

The best practice, however, is to do yearly updates on the value of your firm.  Valuations are not difficult nor expensive (at least compared to the actual value of the firm) but are often critical in assessing values when some unplanned event occurs that requires a quick decision on value.  The founder/owner may become incapacitated or pass away.  His or her heirs may need to know the approximate value of the firm and do not always have the luxury of waiting for a valuation.  There are many valuation firms that can do an initial valuation, at least a pretty good “ballpark” valuation, that can then be updated annually fairly quickly and simply.  Most busy owners, however, just put the valuation process in the “hold” file and never get around to valuation until some event triggers an immediate need for one.

Often, we are asked “what is the standard multiple” of trailing 12 or some other measure of how RIA firms are actually valued?  The simple answer is there is no “one size fits all” valuation method.  For example, an RIA firm with $300 million of assets under management with a large number of clients in their 80’s or 90’s, is not as valuable as a $250 million book of AUM with a much younger, and more widely dispersed client base.  The failure of owners to discover the “magic” formula is one of the most frustrating experiences for those who do want to value their RIA firms and often is what prevents owners from getting a realistic market value. 

Some owners who have partners in their RIA firms also neglect to take into account the reduced value of a minority interest.  Assume an RIA firm with 3 partners, each with a one-third interest.  If the firm is worth $9 million, a one-third interest is not worth $3 million.  There always is a discount for lack of control (i.e. owning less than a majority interest in the firm).    Because so few owners have taken the time to obtain a reasonably good value of their firms, there is a substantial disconnect between what sellers think their firm is worth, and the value assigned to the firm by a potential buyer, which only leads to last minute frustrations.  There is just a lot of misinformation in the marketplace over exactly how to value an RIA firm.

Our advice to our RIA clients is to obtain a competent valuation which typically is based on historical cash flows; AUM and return on AUM.  That value can be updated annually for not much additional cost.  Many owners will be surprised to learn the market value of their RIA firms and if an event presents itself for a merger, sale or other transaction for the firm, the owner(s) will have a good idea at the outset of what their firms are worth.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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