The Art of Valuation

Success in any endeavor comes from a combination of luck, timing, and strategy. If your goal is to grow your practice, acquire another firm, or build a legacy with your financial advisory business, developing the right strategy is crucial to your success. In Sun Tzu’s The Art of War – often cited as the canon of business and military tactics – understanding your unique strengths and weaknesses compared to your competitors’ is the foundation of a successful strategy.

A comprehensive valuation improves the awareness of your own firm, and provides a perspective for your firm to view the broader playing field. For some advisors, the valuation process itself is instructional, revealing the areas of their business they need to track more closely in order to improve their record keeping. This is a valuable lesson, because it enhances the information available for future planning. Further, if the valuation exposes an area of weakness – for example, low client growth compared to the firm’s peer group – an advisor can make tactical corrections to improve the firm’s situation and value.

If your goal is acquisition, you will need to have a complete understanding of your own business in order to identify appropriate targets. Focusing on the right targets allows you to spend less time making introductions, and more time closing deals. For this reason, two valuations per year is optimal—one for your practice and one for a potential acquisition.

Be aware that most successful acquirers are 1.5 to 2 times the size of the acquired firm in terms of value. This value-based perspective takes into consideration not only revenue, but the revenue-producing mechanisms of the firm, helping you choose strategic targets that fit your existing infrastructure, capital, and service capacity.

In The Art of War, the goal is to outsmart your opponents with situational awareness and shrewd observation of the battlefield. A comprehensive valuation will put your practice firmly on the path to achieving your goals.