Hurdle rates, client segmentation, M&A, valuation, exit strategy. You’ve heard of these terms before but maybe aren’t quite sure how they might apply to your financial practice. In this three-part series, we’ll break down some common terms and misperceptions. We’ll show you how looking under the hood of your financials can ignite growth in your practice, streamline your operations and reduce overall expenses. We’ll look specifically at your P&L, the importance of determining your valuation, and client segmentation. 

“Business schools should be encouraging students to learn the critically important discipline of business valuation." – Warren Buffet

In part one of Looking Under the Hood, we talked about how your profit and loss (P&L) statement can uncover insights about your practice. We covered hurdle rates and the importance of individualized benchmarking when it comes to analyzing the data in your P&L. The next important aspect of digging into your practice’s data is determining your current valuation.

Why is valuation so important?

You’ll need to determine a valuation in order to do any of the following

  • Sell your practice
  • Buy another practice
  • Sell your practice and retire
  • Sell your practice and stay
  • Incentivize key employees or partners
  • Pass down or transition your practice

Additionally, a valuation determines how much your loved ones will receive, and how they’ll be protected in the event that you need to make an unplanned exit of your business due to unforeseen circumstances. A yearly valuation is a good habit to have, ensuring you don’t have to start from scratch.

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How do you determine value?

Valuation comes down to three simple factors that require both qualitative and quantitative analysis. It’s one of the most difficult pieces of business planning to do on your own, because you’ll typically need an objective party who knows the industry inside and out to look at all the factors with you. Together, you’ll need to look at the following: 

  • Value of your assets
  • Value of your practice to an outside party
  • Current market for similar practices

There might also be unique features to your practice, and the reason for the valuation – retirement vs. acquisition – can play into your valuation. While these factors all seem straightforward, the reality is they require an in-depth look at your own financial data, as well as a targeted and highly individualized benchmarking. 

Buying and selling

Buying another practice or book of business is one of the fastest ways to grow your practice. However, beyond the simple question of “Can I afford it?,” you’ll need to stress-test your business. You’ll also need to figure out how to integrate not only new employees, but new financials. Partnering with a trusted source to help you with this transition is important. 

Advisor Evan Harris of Whitefish, MT has utilized Business Strategy Services to overhaul his client strategy and revenue model. Now he’s starting to look at buying another practice in his area. “We’re at the point now where we're starting to think about acquisition. There are advisors looking for a succession plan, and we want to set ourselves up to be that succession plan. Business Strategy Services has played a huge role in getting us organized enough to be able to start to go forward with acquisition; allowing us to hit new highs as a business.” 

If you’re thinking of retiring and selling your practice – whether you want to “sell and stay” or just sell and retire –  a valuation plays a pivotal role in determining how much equity you’ll yield from your years of hard work. You don’t want to lose value or even be undervalued at this important time. This is the culmination of all you’ve worked for, and valuing your practice accurately can influence the rest of your life. 

As you can see, an accurate and thorough valuation plays a role in many aspects of your business. If you’d like to talk to one of our Business Strategy Services consultants, schedule a complimentary consultation today. 


If You Value Your Business, You Should Value Your Business (