Some advisors were skeptical when WP ran an article
in November suggesting a book could fetch as much as five times revenue. It not easy but it can be done.
“Even at 2.5 x annual revenue, it would take about 10 years to break even. Here’s the math. The usual split between an advisor and the firm, for higher producing advisors, is 50%, so the advisor only receives about half the annual revenue,” said an advisor anonymously in an email to WP. “Expenses and CRA take, on average, half of that so the advisor ends up with only 25% of annual revenue net in his jeans at the end of the day. Paying 2.5x and receiving only .25x means it takes about 10 years just to break even. At 5x annual revenue it would take about 20 years just to break even.”
This particular advisor also implied in their email that they have never paid more than 1 times revenue for a book whose recurring revenue was 80% or higher and in a situation where most of the clients were already known to the advisor.
That’s a good gig if you can get it but Evolution Wealth Advisors’ CEO Steve Meehan is equally skeptical.
“In general I would say the average is 2-3 times,” Meehan told WP. “People selling for one times might have a small book but why would you do it [sell] for one times? Anyone who’s saying one times book, send them to me and I’ll give them one-and-a-half times, sight unseen.”
So, how does one get more than the average? It all depends on your client profile says Meehan.
“Account size is pretty important. Our whole model revolves around moving them [advisors] into an investment counsel platform so they need to be bigger accounts. Smaller accounts don’t fit our business model,” said Meehan. “So, they need to have clients that are big enough that it makes sense for them to gravitate towards an investment counsel model which ultimately benefits the client because it lowers their fees. For us we get a double win because we’re not just buying the advisor’s revenue but we’re also garnering revenue that otherwise would have gone to another investment management firm.”
Evolution is able to benefit from moving books because they are affiliated with Bellwether Investment Management Inc. and Archer ETF Portfolio Management who provide advisors with active and passive investment counselling to individuals and institutions. In other words, they’ve got the right infrastructure in place to make their model work – skeptics aside.
“Every book is different. I don’t want to run around saying we’re paying five times because what’s the point of negotiating but it could be worth as much as that depending on the profile. It depends on a bunch of things including the profile of the clients but also what the advisor wants,” said Meehan. “The beauty of our model is that we plug into an advisor and then create a plan. So, generally we’ll take a stake in their business today of anywhere from 5% to 35% and then give them a designed exit strategy that they can execute over the number of years they choose, which is actually preferable because then we’ve got a runway working with advisors and a smooth transition to what we want to do. If somebody wants a quick exit that would make for a lower valuation because we’re taking on more risk.”
Is five times revenue possible?
It is if you’ve got a book of clients with assets between $250,000 and $500,000 and are willing to remain involved in your business for a number of years into the future. If you want to cut and run and your average account size is closer to $100,000 or below, than two times book is a more likely outcome.
One times book? That’s doubtful.