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06 June 2019

Leverage Technology to Drive Business Valuation

Change is a constant in the wealth management industry, yet the pace seems to be accelerating these days, with a number of macro trends picking up steam and converging at once.

The first is simply the unstoppable passage of time – the industry has been characterized as “aging advisors serving aging clients.” Not only is the baby boomer generation well into retirement age, but the average advisory firm principal is nearing 60.

And it explains, in large part, the wave of consolidation rippling through the industry, as retirement-age advisors decide it’s time to hang it up and seek to exit the business in a position of strength.

As a result, M&A activity in the industry is at peak levels, all of which is creating opportunity for both buyers and sellers. For buyers, it’s a chance to leverage their back-office efficiency and gain scale without a significant increase in operational overhead. For sellers, it’s an opportunity to optimize the value of their life’s work. With an estimated 10 buying firms for every seller, it’s widely viewed as a seller’s market for the foreseeable future.

So, what can sellers do to ensure they make the most of this once-in-a lifetime monetization opportunity, particularly as the markets remain at all-time highs?

M&A multiples can range from 3x to 12x earnings or cash flow, based on scoring firms on several key value drivers, including financial performance, clients and client service, human capital, business process and operations, portfolio management, sales and marketing, and legal and governance. The cumulative score on all these factors determines the multiple.

For firms interested in selling, that raises an important question: what can you do to increase your cash flow and, by extension, your multiple?  “Technology can produce savings by reducing the amount of time spent on repetitive tasks,” noted Dan Seivert, CEO of Echelon Partner “And it also frees up capacity to spend more time on marketing and client service. So, technology has a dual benefit, not only cutting costs but also helping drive revenue growth.”

It stands to reason that a more efficient operation is likely to be more profitable and hence more attractive to buyers. But what does that translate to in valuation?

For all RIA firms, profit and loss consists of two line items:  direct expense, meaning the cost of advisors and overhead, including the back office, administrative staff, compliance, and everyday operating expenses such as rent. What’s left is the profitability or cash flow of the firm.

Experts agree that firms can and should leverage technology to drive greater profitability and cash flow, by increasing both back office efficiency and front office productivity.   By increasing cash flow, firms are able to gain tremendous valuation leverage, sometimes in the millions of dollars range.

The time to think about ways to maximize the value of the business you’ve built is well before you start putting feelers out in the market. Some of the variables that affect valuation are out of the firm owner’s control, but one is very much within your control: your technology investment.

The right technology can lower expenses, increase scale, fuel growth, improve client retention and streamline the business – all factors that ultimately improve cash flow. Not only will revenues rise, but in many cases, expenses will stay flat or potentially decline. Even in a seller’s market, firms that have invested wisely to keep their technology up to date are bound to stand out.  Buyers are looking for firms with a modern technology stack to attract younger advisors and retain the next generation of high net worth individuals. 

With the Black Diamond® Wealth Platform as the hub of your advisory business, your firm will be better positioned to maximize its value in the marketplace.  Black Diamond delivers the operational efficiencies and productivity gains that have a direct impact on increasing cash flow.

In addition to performance reporting, rebalancing and client billing functionality, the platform encompasses daily reconciliation services, and features an award-winning client portal with mobile access and self-service capabilities.

Black Diamond also has integration partnerships with a growing ecosystem of complementary solutions, including financial planning, portfolio analytics, risk profiling and CRM software, as well as access to traditional and alternative managed account platforms.


To learn more about the power of technology leverage, download our white paper, The Technology Impact on Business Valuation – Optimizing and Monetizing Your Life’s Work.