How to Value a Business: A Buyer’s & Seller’s Perspective Darren Miles, CBV April Reilly, Assante Wealth Management Whether you are considering buying a practice or selling one, or you are an owner of a team-based business with plans to offer an equity stake to key personnel, you will benefit from attending this session. Last year we introduced you to Darren Miles, a Chartered Business Valuator, to help us understand why it is important to value your business and different things you can do to enhance the value. While we remind you of these value drivers throughout the presentation, this year we wanted to dive a little more deep into the mechanics of structuring a deal.

Fair market value  definition The highest price available, in an open and unrestricted market, between informed and prudent parties, acting at arm’s length, under no compulsion to act, expressed in terms of money or money’s worth. 2

Why find out what your business is worth? Life events * Shareholder dispute Tax efficiency * Benchmarking * Capacity Optimize value * Business events Shareholder agreements * Estate freezes Disability * Team building * Divorce Death * Corporate reorganizations Buy and sell a practice Life Events Death, disability, divorce, shareholder dispute Estate freezes 2. Capacity driving partnership agreements Form a multi advisor corporation Need to build a team Create shareholder agreements 3. Tax Efficiency: Buy-back, share versus equity, incorporation if possible 4. Optimize value: time, day to day, cash flow which translates into efficiency and end value. 5. Business Events:Sell or buy a practice Benchmarking Corporate Re-organizations

Key factors in valuation of goodwill Ensure the value of the goodwill is Trustworthy Transferability Replicability economic Utility Sustainability Transparency

Three critical thresholds Typical AUA/revenue thresholds Business decision turning points $30 million  $50 million AUA $300,000  $500,000 revenue  Have an assistant  Reach a capacity plateau depending on whether you are managed money or à la carte $75 million  $100 million AUA $750,000  $1 million revenue  Add additional assistant/junior/associate  Set long-term business objectives (envision exit strategy)  Leading and building a team; determine clear roles & responsibilities; add capabilities and expertise  Work on the business, not in it $150 million  $200 million AUA $1.5 million  $2 million revenue  Multi-advisor, broader ownership/partnership trend.  Run multiple processes with departmentalized expertise  Your long-term goals are now short term

Business considerations – regulatory landscape Fee disclosure and legislation leads into requirement for lean and efficient operations Regulatory changes creating demands on advisors and staff: agendas to review all fee disclosures, detailed notes to prove conversations, logging who you can market to and which campaigns are working, searching and documenting delivery of fund facts. Greater Transparency Compensation shifts to fee-only or fee-based planning: As portfolio construction and asset management tasks become more automated in the future, the cost of planning tasks such as these could drop from tens of thousands of dollars at the high end to nearly zero. Partly as a result, planners may need to develop new skills and services for clients in order to generate new streams of income and remain competitive. What are you doing with smaller clients? How long have you kept client? What is your expectation in hourly compensation level. Opportunity to say, here is what we are doing with our business, opportunity to disengage. This model does not make sense to you. Do not get trapped in expectation that a $50k client will get big….but is $150 big enough? Don’t ‘clean house’ look at time you have and where you want to go. Think of it as an hourly basis rate. Eventually number of time spent will not make sense. Smaller firms will continue to be acquired by and merge with larger firms to avoid heavy compliance costs in an increasingly complex regulatory environment. Yet as compliance burdens rise, technological advances will cut costs. Definition of What is big in new world versus old world. Used to be buy book to reach 2-300 clients with $150mil AUA and you are set. Now clients under 2-300k do not make sense. Advisors with clients with $150-200 are getting squeezed. How do you manage this? Only if smaller accounts are ‘ESSENTIAL’ to larger ones should they be kept. How long will you allow that situation to occur? If you know a client has multiple advisors ask them how long they want that situation to last? Should only ‘date’ them for 6 months to a year. What is RETURN on client?

Business considerations – leveraging technology Artificial Intelligence, robo-advice Security and the cloud Outsourcing AI – If clients feel they are so educated that they don’t need you…maybe you don’t need them. As planning technology develops - a souped-up version of Apple's Siri personal assistant that will combine client relationship management software with so-called big data tools and companies selling different products. S&C - As more technology moves off the desktop and toward mobile access, expect to see more systems with redundant log in requirements. Systems might combine password, fingerprint, voice recognition and iris-scanning entry points to allow secure access. Need to be safe. O – CRM incorporating changing regulatory needs (do you want 100% of what you want or 80% so you can focus on revenue generating activity). Consider vendors like IPOS Client trust – information secure. Appreciate leveraging of technology, integrating. Has to be SECURE. Expectation in younger generation that it is secure, expectation with older generation is it is not. Make differentiation with service offering – greater package = greater AUM = greater revenue = greater value. Ultra-high net worth is different… Ability to collect and mine such large amounts of data will change client relationship tools, which will continually mine clients' social media accounts to look for life-changing events like job changes, marriages, divorces, births or deaths in the family. Those findings will flow into action items for planners and their staffs, who can then opt to contact those clients to update wills, account allocations and trusts. Revenue generating activities? Data mining CRM to determine where opportunities lie, who is providing referrals, who is making additional contributions, who is bringing in family members. keeping close contact with people who like to be left alone, client audit/advisory boards. Remove reliance on one key person and putting it in a system which provides stability Demographics

Business considerations – team dynamics Blackhawks sign Jonathan Toews, Patrick Kane to eight-year extensions ''It's about the process, but in the end, it's about scoring.'' Succession plan not ironed out. If junior is not engaged, they will become resentful. The reason why they haven’t done it is because afraid of result. Weird in world of financial planning. How many people have a will? Need because of demographics of advisors. Maximize efficiencies with economies of scale – removing redundancies 1) leveraging fixed costs like office space, employees and staff. Increased professional education Succession planning and new partnerships – team based practices Importance of timing when structuring deals and commitment to process Growing trend of team based/intergenerational/intergender practices Who is growing? Larger practices that are defining their ideal clients and sticking to plans. teams diversifying their service offering stats from Britain on retiring practices due to regulatory disclosure, predictions of smaller firms being eaten up because they cannot meet technology costs associated with meeting regulatory requirements. What business your working towards? Not taking every client that walks in your door. Partnerships that make sense. Pros and Cons. Less risky when working towards transition. If only economies of scale, two personalities.

Business considerations – changing demographics Aging population on value of book Intergenerational wealth transfer***money at risk (kids with their own advisors) – have estate planning addressed when they are in their 50s Longevity Risk – sequential retirements (retire, work, retire) Increased financial literacy of clients Exit strategy – Trend more advisors will be working for longer because they don’t have enough capital, they are afraid of being bored. What does that mean? Accountants retire at 65, Lawyers stick around but there are implications for partners and clients, Advisors – liability, reputation risk, impact on succession – how to incent Someone to come in if they don’t want to go? Options to discuss without having to make a commitment.

What are the benefits of executing a valuation? Maximize the value of your business. Build a solid foundation. Prepare you for the eventuality of a transition. 1. Lead time 5-10 if selling, working with someone for 3+ years if considering share ownership. Creating a baseline to measure progress against. 2. Understand areas focus and value drivers. 3. Teams diversifying their service offering stats from britain on retiring practices due to regulatory disclosure, predictions of smaller firms being eaten up because they cannot meet technology costs associated with meeting regulatory requirements. Being ready for the growth in transitions within firms, practices and changing demographics. Changing face of succession planning. Merging and buy-in. Team based practices and changing demographics. We have talked about why you should be doing it now lets talk about the details of the valuation process, what it entails, some methodologies and how it can be structured given each individuals unique situation. Why build out a team? More services, more capacity Broaden relationships: with more clients, of my team with clients, with COIs, nextgens Always managed money, but institutionalization gives us 1) sustainability 2) pipeline What did I intend to get out of the process? Bottom up AND top down approach Structured AND organic growth and processes Overall objective to do better for my business BY doing better for my clients Based on an assumption that if I use a valuation, plus a people and process driven framework, I’ll get good at navigating how to increase the value from the 2010 value to whatever I want it to ultimately be Where might someone begin? Benchmark to find your current & target threshold Use a business valuation to motivate you and define areas of greatest potential Challenges of implementing change – psychological barriers to starting the process

Service industry valuation metrics Discounted cash flow  preferred method Identify a baseline Goodwill Buyer beware Discounted Cash Flow - Preferred method Cash Flow Stream – discounted for risks associated to future replication Forward Looking Comment – Capitalization of discretionary cash flow Assumptions – Professional Practices Purification Receivables Debt Normalization of Statements Buyer Beware - Overly Aggressive Projections Market Remuneration Discount Rate vs. Capitalization Rate Terminal Value Accounting, law, dentistry – financial industry coming in line Goodwill value –strength of underlying relationships coupled with recurring and predictable fee structure Critical revenue thresholds that require action – i.e hiring, revenue (darren slide) Assumption of worth - Buyer Beware - Overly Aggressive Projections

Tying it all together Triggering events Weighting (current environment) Discounted cash flow – 90% Market comparative – 10% Debt retirement analysis Ideally have buffer cash flow position Multiple triggering events – family transition, health, estate freezes, junior, etc. Transaction versus estate planning Expanding ownership Moving from sole practitioner to partnership/ensemble Tie people in to reduce risk in practice.

Structuring a deal Sequential buy-in versus 100% equity event Vendor take-back versus earn out, i.e. financing Asset versus share deal Post-transaction consulting agreements On Assante radar – secure equity and share of practice. When a legal agreement that has non-100% equity change. More details. Shot-gun clauses to even deal. Notice period if one party wants to buy another out, get a valuation or binding arbitration (50-50 partnership). If buy–in over 5 yrs, add clauses ‘ you can’t sell portions unless…x protecting rights of shareholders and maintaining the liquidity of the shareholders as well. If it is a 10 yr plan and after 3 years, don’t like each other…make sure this is individual you want to deal with. Make sure you can buy out at fair market value. Definite more risk. As you add in variations of equity events there are different levels of risk that require different clauses. Include checklist of risk factors being addressed. Down payment, attrition clauses Tax treatment for payments over a period of time IIROC versus MFDA Money being paid mirrors equity transition Issue with sequential buy-ins – taking profits from business and paying it out. Less cash flow for payments to be made. May need additional financing.

TOP 5 factors for an optimal valuation Lead time: 5 to 10 years. Think of your business as “a business” versus “a book.” Understand critical thresholds: $300,000, $1 million, $2 million. Implement and document a process and structure. Sustainability and replicability of the revenue stream. By understanding what your valuation is and having it documented, you can limit negotiation with potential buyers when discussing what your practice is worth. 1. Lead time - This is your exit strategy. What you are going to see today will show you the value of giving yourself solid lead time. Most advisors don’t valuate their business until it’s time to sell* 2. This seminar will show you value of changing the way you think about your business/practice – the value of thinking of yourself as a CEO 3. These are typical ‘turning points’ for most advisors (see more on next slide) 4. Some of the process & structure we are going to talk about: Capacity, segmentation, optimized revenue structure Team/org structure Roles & responsibilities 4. Create a Valuation Binder with the following sections*: Sales & Marketing Process Overall Business & Operations Compliance Documents & Files

Key points Valuation methodologies Tax treatment Payment structures Agreements and documentation Value drivers and value detractors How many of you know the value of your business?

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rate which is used to determine the franchise value of your business Checklist handout Valuation criteria Requirement Impact on cap rate Sales and marketing process Up-to-date marketing material; sales targets in place; target market leveraged, process and team cohesion Overall business and operations Clearly defined roles and responsibilities; client process; strategic plan for managing growth; annual operation reviews, employee’s engaged. Compliance Registration/licensing up-to-date; compliance and privacy requirements enforced and communicated to employees Documents and files KYC documents retained; accessible client files for employees to service appropriately In-depth financial analysis Move to recurring revenue, efficiencies increase net margin, organized financial information “Institutionalizing” or improving these areas can positively impact the discount rate which is used to determine the franchise value of your business Each area can provide a positive impact by lowering the discount rate.

High impact valuation areas – Before and after case study Valuation criteria Before After Sales and marketing process Too many clients No process Low assets/revenue per client Systematic client service model Estate planning High assets/revenue per client Overall business and operations Transactional revenue results in volatile cash flow Lack of control over service time Marginal annual cash flow increase Team aligned Recurring revenue Positive annual growth of cash flow Firm grip on expenses Compliance Poor compliance regimen with risk of future lawsuit Centralized and communicated; everything documented Documents and files No time to document properly/efficiently Diligent records