On Small Firms, Mark Hurley, Valuation Is in the Eye of the Beholder

 

If the responses to my November Investment Advisor column (on Mark Hurley’s recent report about advisory practice values, View Askew) are representative, at least the most vocal financial advisors agree with me that small advisory practices do indeed have value. As one advisor wrote: “If a fee-only advisor, with a client base and value system similar to ours, approached us to buy his or her firm, for two times revenue paid out over five years, I would buy the firm. I think it’s a no-brainer, even if they had only $50 or $100 million in AUM.”

The irony is that when Mark Hurley launched his Fiduciary Network, which acquires minority interests in advisory practices providing them with capital to grow and for the junior partners to buy you, the senior partners, he told me that he believed the market was undervaluing advisory practices. That seemed dead-on to me, but it turns out he was only talking about the largest firms (with $750 million or more in AUM).

I suppose we can’t really blame him: Mark comes from an institutional background (Goldman Sachs), and brings the same perspective as most of the banks and other institutional buyers of independent advisory firms: That in order to have value, a firm

 

has to be a standalone business, capable of being transferred to a new hands-off buyer as an investment. By that standard, most smaller practices aren’t very attractive.

Yet I believe Mark’s original statement to me on valuation holds just as true for smaller practices as for larger ones: 


“The long-term future value of the revenue stream from these practices is much higher than the prices currently being paid.” 

Consider a simple example of a practice with $100 million in AUM and $1 million a year in fee revenue. What’s that practice worth?

What’s the present value of $1 million a year for 20 years? Even assuming no growth, and a pretty steep discount, it’s certainly a lot more than the $2 million or $3 million that practice will fetch on the market today. That makes it quite a bargain at those prices.

You just have to have the right buyer: an existing local practice with excess capacity and a similar approach to clients and investing. I believe a lot of tomorrow’s Hurley-size firms will be built through acquisitions today. 

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