You own an independent financial service or registered investment advisory firm. You’ve worked hard, built it from the ground up, and watched it prosper. So, what is your firm now worth?
It’s a good question. While determining the answer may appear complicated, it’s actually relatively easy. To help us understand how value is determined, let’s hear from a leading expert.
I recently talked on my Bridging the Gap podcast with Bharat Kanodia, founder of Veristrat LLC. His remarkable insights and expertise in valuations have made his company an industry leader. Bharat has offered valuations for founders and venture capital investors alike and has appraised many startups, including Uber, Airbnb and DoorDash, to name just a few.
So, how do you determine your firm’s value?
“There are three primary ways of valuing a business,” Bharat began. “The first method is an income approach where you look at the cash flow the business brings you over the next year or so. The next way is sales or comparable approach. Think of it as a house. If you think your house is worth $100,000 and your neighbor just sold their house for $120,000 and your house is the same as theirs, then your house is worth $120,000. And the third approach is asking, ‘What would it cost me to build this house today from the ground up?’ Which is called the cost approach.
“So those are the three criteria: the income approach, sales or comparable approach, and the cost approach. You can pretty much value anything in the world based on these fundamentals Because as long as you keep these building blocks in mind, you can look at any asset.”
Once the value is determined, how do you maximize that value?
“It’s really straightforward,” Bahrat explained. “There are two things that maximize the value of the company. One is consistency in cash flow. Buyers or Wall Street, or investors want to see consistency in your growth, cash flow, traffic, and engagement. And the second thing is automation or running the business on autopilot.”
He offered, as an example, Netflix.
“Why is it so valuable? Because you pay the $10 or $12 a month to Netflix, and you don’t even blink an eye. You’re like, ‘Fine, whatever.’ That’s consistency in cash flow. The same customer is paying Netflix money again and again and again, and they don’t really care. That’s important.
“That’s followed up with automation. Netflix just puts the film on their platform, and millions of people can watch it or rewatch it at the same time. And they [Netflix] don’t have to do anything. All they’re doing is creating content and adding more content to the system. It’s like a library.
“So, if you can create a business that shows consistency in whatever you’re doing, and you can serve your customers or your clients as if the business runs on autopilot–that could be automation or having multiple layers of management—those businesses are valuable.”
Now let’s translate that to your firm. You’ve established a reliable business. Check. You provide a service that our clients value. Check. That service provides a steady revenue stream. Great! What do you do next to make the most of your situation?
Three simple words: Keep growing.
Firms that aren’t moving ahead are fossilizing. And there’s a place for fossils: It’s called a museum. Don’t allow yourself to become yesterday’s news. Stay on top of your game by following three simple guidelines to maximize your value.
- Know your ratios. As in your debt service coverage ratio and cash flow coverage ratio. Lenders, investors, and even potential partners will want to know those figures. Make sure you stay on top of them.
- Keep your revenue streams steady and predictable. Nothing improves your value more than that.
- Have a strong executive team. Leadership is essential. If the folks at the top don’t know where your firm is headed, how can any other team members? Make sure the people with their hand on your firm’s rudder have talent, experience and a clear vision of where you’re going.
You worked hard to get your firm where it is today. Take time now for a thorough self-evaluation of your current condition to ensure you will enjoy an even brighter tomorrow.