PRACTICE VALUATION: HOW TO VALUE YOUR BUSINESS AND TAKE IT TO THE NEXT LEVEL OF GROWTH? April Reilly, Assante Wealth Management, Darren Miles, CBV Gillian Stovel Rivers, Assante Financial Management Ltd.

Leave a Legacy Client Security Mentorship Monetary Reward WHAT MOTIVATES YOU?

PRACTICE TRENDS Succession planning (business planning, legal review and financing) Recruitment New skills requirement

REVENUE TRENDS Growing AUA/AUM Process oriented Growth goals Thin product shelf Team dynamics Static AUA/AUM Limited processes Service focus Limited pipeline Lack of incentives vs.

Valuation analysis Why find out what a business is worth? Identifying a baseline. Roadmap to increase your value. Implementation.

Life events Business events Tax efficiency Capacity Optimize value Why ?

FAIR MARKET VALUE Definition – The highest price available, in an open and unrestricted market, between informed and prudent parties, acting at arms length, under no compulsion to act, expressed in terms of money or money’s worth.

THE BENEFITS OF EXECUTING A VALUATION? 1.Maximize the value of your business. 2.Growth in transitions within firms. 3.Avoid pitfalls of rules of thumbs. 4.Build a solid foundation.

SERVICE INDUSTRY VALUATION METRICS 1.Discounted cash flow - preferred method. 2.A word on methodology. 3.Goodwill. 4.Buyer beware.

Valuation analysis Why find out what your business is worth? Identify a baseline. Roadmap to increase your value. Implementation.

FIVE FACTORS FOR AN OPTIMAL VALUATION 1.Lead time: 5 to 10 years. 2.Think of your business as “a business” vs. “a book.” 3.Understand critical thresholds: $300,000, $1 million, $2 million. 4.Implement process / structure and document. 5.Move to recurring revenue. By understanding what your valuation is and having it documented, you can limit negotiation with potential buyers when discussing what your practice is worth.

THREE CRITICAL THRESHOLDS Typical AUA/revenue thresholds Business decision turning points. $30-50 mil AUA $3-500,000 revenue -Have an assistant. -Reach a capacity plateau depending on whether you are managed money or à la carte. $ mil AUA $750-1 mil 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. $ mil AUA $1.5-2 mil revenue -Multi-advisor, broader ownership/partnership trend. -Run multiple processes with departmentalized expertise. Your long-term goals are now short term.

TYING IT ALL TOGETHER Structuring a deal – Vendor take-back, earn out, asset vs. share deal. Weighting (current environment) – Discounted cash flow – 90% – Market comparative – 10% Debt retirement analysis. Ideally have buffer cash flow position.

Valuation analysis Why find out what your business is worth? Identify a baseline. Roadmap to increase your value. Implementation.

OUR PRACTICE SNAPSHOT 2009 TO households >>> 146 households $100M AUA >>> $137M AUA 99% managed money Team transformation over this time to: – One senior service associate – One COI specialist – One marketing & communications associate

OUR OBJECTIVES 2009 TO 2013 Why build out a team? – More services, more capacity What did I intend to get out of the process? Where might someone begin?

OUR PRACTICE: BEFORE AND AFTER CASE STUDY Valuation criteriaBefore (2010 valuation)After (year 3 of 5) Sales and marketing process  Keep number of clients but grow AUA  Adhoc new client referrals  No real pipeline strategy or process Overall business and operations  Advisor did meetings, Assistant did file prep, Advisor did financial plans, we both did follow up  Manageable to a certain # of families Compliance  Satisfactory compliance regimen since all IPS driven, all client name, all tied to wealth plans Agility and ability to grow  No capacity for growth or “marketing”  Little time for high level client, COI or even my own business strategy ☺ 12% more HH = 25% more new $$ ☺ Referral strategies: client, COI, nextgen ☺ Profile, communications & education ☺ Team aligned with a workflow ☺ Money loves a vacuum of capacity ☺ Positive annual growth of cash flow ☺ Expenses after payroll jump stable ☺ Same as before but more specialized eyes on tax and estate (COI associate), so more flexibility for “new issues’ ☺ Engineered for growth & capacity ☺ Increasingly “organically orchestrated” time with COIs, multigens, team work

QUESTIONS

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THREE CRITICAL THRESHOLDS Typical AUA/revenue thresholds Business decision turning points. $30-50 mil AUA $3-500,000 revenue -Have an assistant. -Reach a capacity plateau depending on whether you are managed money or à la carte. $ mil AUA $750-1 mil revenue -Add additional assistant/junior/associate. -Set long term business objectives (envision exit strategy). -Leading and building a team; determine clear roles and responsibilities; add capabilities and expertise. -Work on the business, not in it. $ mil AUA $1.5-2 mil revenue -Multi-advisor, broader ownership/partnership trend. -Run multiple processes with departmentalized expertise. -Your long-term goals are now short term.

HIGH IMPACT VALUATION AREAS - BEFORE AND AFTER CASE STUDY Valuation criteriaBeforeAfter 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 law suit. Centralized and communicated; everything documented Documents and files  No time to document properly/efficiently Diligent records

BEFORE AND AFTER HYPOTHETICAL CASE STUDY Valuation criteria BeforeAfter Financial evaluation  $880,000 (non-recurring revenue)  NIBT $220,000 (assumes 25% of revenue based on lack of efficiencies)  $185,900 after tax cash flow (ACM) $1,000,000 (mostly recurring revenue) $1,000,000 (mostly recurring revenue) NIBT $300,000 (assumes 30% of revenue based on improved efficiencies) NIBT $300,000 (assumes 30% of revenue based on improved efficiencies) $253,500 after tax cash flow (ACM) $253,500 after tax cash flow (ACM) Risk factor  Higher risk, higher cap rate (assume 30%) Low risk, low cap rate (assume 25%) Low risk, low cap rate (assume 25%) Enterprise value  $619,667 $1,014,000 $1,014,000 A move to higher, recurring revenues coupled with a 5% reduction in risk levels can translate into more than $400,000

CHECKLIST HANDOUT Valuation criteriaRequirementImpact 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. ComplianceRegistration/licensing up-to-date; compliancy and privacy requirements enforced and communicated to employees Documents and filesKYC 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 your business’ franchise value rate which is used to determine your business’ franchise value