What Drives Practice Value

Learn how to maximize your practice value

You work hard to show your clients value—to help them reach their goals and reap the benefits of the advice you provide.

What about your ultimate goals and the value of the practice you’ve built? It can feel a little ambiguous to try to assign a value to your book of business, like you might a stock or a home. How you view value—and work actively to influence it—should play a big role in your strategic planning and your plan for growth.

Knowing your business means knowing your numbers. But placing an objective value on your book of business—the long-standing relationships with clients who look to you for help in pursuing their goals—can be a bit tricky. The earlier you learn that value and can begin to maximize it, the greater your growth potential. That’s the key finding in our 2018 Advisor Benchmarking and Practice Management Study, which focused on what some of LPL’s most successful advisors are doing to grow the value of their practices.

Seeing the whole picture

A valuation is the estimated sale price of your practice. The challenge comes in calculating that price. Many analysts will start by crunching revenue, profits, and expenses, but those are only a few factors that go into a business’s overall value. If that’s the only lens you’re using, you will likely get a skewed result.

Value is driven by future potential—where your business is heading over the next five years or more—not just year-to-year growth and portfolio performance. A true valuation takes a holistic look into your business and what gains you might achieve by pulling the right levers now.

Driving your value

So what adds up? It’s about the factors that play into the transferability of your practice and your successor’s ability to retain clients after a sale. Our Benchmarking study found many features of a practice—and specific activities—that can affect its valuation. For example:

Asset concentration: Having just a few clients hold a heavier concentration of your firm’s assets under management could affect a sale price because of the greater risk associated with losing any of those individuals. Spreading assets across more clients eases that risk and can boost your value.

Sustainable revenue stream: One way to bring stability into your practice is to introduce advisory when appropriate for the client. Advisory offers an opportunity for a deeper relationship with your clients, the potential for a steady stream of revenue and scalability, and reduces some of the risk that comes with commissioned accounts. The study showed that practices with advisory in their mix realized greater revenue growth and the potential for higher valuations.

Technology: As practices begin to move towards an Advisory focused business model, access to technology that facilitates the transition from brokerage to advisory platforms and provides consistent reporting to clients, can streamline operations and add value.

Succession planning: Even if you don’t have immediate plans to sell, what if something happens? Having a plan for when you leave the business—for whatever reason—counts toward stability. A potential buyer wants your clients to have multiple and consistent relationships in the office to ease the impact of your departure. Even the name on your door could play into value, since institutional branding is easier to maintain after a sale.

Acquisitions: Our survey found that acquiring other practices is one of the fastest and most reliable ways to cultivate greater value. Acquisitions give you access to new customers, higher sales, new distribution channels, and ultimately higher profits.

Outsourcing: Outsourcing routine tasks such as human resources, technology, and research allows you to focus on what you do best: serving your clients and driving revenue.

The aspects of an advisor’s business that build the most value are influenced mightily by the industry climate, its direction, and the evolving needs of investors. Knowing your value and understanding how you can influence it will help you focus your time and energy on maximizing that value. Engaging in such best practices can leave your business in a strong position for success today and well into the future.

For more on information on what you can do to maximize the value of your business, download our white paper, 3 Strategies to Help Grow Your Practice’s Value.