If you stay in the magazine business long enough, you’ll most likely be involved in the sale of a magazine or an acquisition, or both (and stay with me–we’ll get to advisory firm valuation soon). In my 30 years in the business, I’ve been through two acquisitions, and learned a lot about the business, both times. One of the things I learned is that there are companies who are in the business of buying and selling magazines, and they are very good at: I was at Financial Planning magazine when the acquisition team at Thomson Publishing structured a deal that enticed the old IAFP into selling the magazine to Thomson for far less than its value.
I also learned that experienced magazine buyers aren’t very concerned about the current profitability of the magazines they buy: they know how to manage mags profitably, and have systems set up to do it. So they focus instead on the quality of the advertising revenues, the costs of the readership base the advertisers want to reach, and occasionally, the editors and writers (although, deep down, they always seem to figure they can get another writer or editor). The bottom line is that they don’t care too much about whether the current owner can run a magazine at a profit: only whether they could.
My magazine experiences came back to me yesterday, as I was reading the latest postings in the “Succession Planning for Financial Advisors” discussion on Linkedin.com. One comment was titled “Revenue is NOT a measure of true value,” and went on to say: “This is analogous to a piece of barren land being worth the same as the equivalent land with a 4-plex on it generating cash flow. This is simply NOT the case. As an industry we are deluding ourselves if we believe only in revenue as a metric of value.”
As more and more Baby-Boom-vintage advisory firms come up for sale or succession these days, the question of valuation is a recurrent theme. There are many methods to value a “small business” such as independent advisory firms—discounted cashflow, a multiple of earnings, a percentage of client AUM, etc.—but revenue multiples get little respect these days, as was the case in the discussion above. Yet in many of the discussions I’ve come across, I’m a bit surprised at the absence of considering why a given acquisition is being made. To my mind, and experience, the reason behind a business purchase has a lot to do with how that business should be valued.
In answer to the comment on revenues above: If I’m looking to extend my airport runway, barren land is exactly as valuable to me as a parcel with a 4-plex on it, which I’d have to bulldoze anyway. With an advisory business, it seems to me ‘why’ I want to buy it also informs the factors which make it valuable to me. If I’m a young advisor who wants to take over an existing firm, then the profitability, which will comprise my paycheck, is very important to me. (But even then, if I can see some obvious ways to greatly improve the currently low profitability—say, using better technology to reduce staff—the low profitability is actually attractive to me because I can use it to negotiate a lower price.)
More typically, if I’m an advisor with a very profitable business, looking only to transfer another advisor’s clients into my system, like the magazine pros, I couldn’t care less what his ‘profitability’ is: my only concerns are the quality of his clients (age, wealth, accumulation/distribution status, required services) and the likelihood of transferring them into my firm and its highly profitable system.
So, yes, a useful firm valuation does require more than simply focusing on last year’s revenue number, but high quality revenues can be a sound basis for valuing an advisory business—or a magazine—depending on why one is buying the business and their ability to manage that business profitability.
In fact, knowing a revenue stream’s true value to you can be a huge negotiating advantage if the current owner believes his or her business should be valued based on its currently low profitability.