Ultimately, the largest advisory firms that have greater complexity may still want to rely on custom valuations using the DCF approach, and a growing number of online valuation tools for advisory firms are starting to crop up to compete as well. In fact, a growing number of firms get regular valuation updates every year or two, just to understand how the value of their firm is changing, and whether/how they should make changes to further enhance the value. Unfortunately, the FP Transitions CVR valuation estimate isn’t quite as cheap and accessible as buying the Kelley Blue Book – due to the harder-to-value aspects like transition risk and cash flow quality that must still be considered – but nonetheless, at $1,200, it makes getting a reasonable valuation accessible for the vast majority of independent advisory firms. In the context of advisory firms, the leading “Kelley Blue Book” solution for valuation is FP Transitions and its “Comprehensive Valuation Report” (CVR), which uses their comparables database of more than 1,500 advisory firms bought and sold in the past 20 years to estimate the value, after making reasonable adjustments for transition risk, cash flow quality, market demand, and the payment terms of the transaction itself. In fact, sometimes digging further into the piecemeal value of the business isn’t even relevant, just as no one values a car by disassembling it to value and then add up all the component parts instead, for nearly 100 years, they’ve just looked up the going market value in the Kelley Blue Book instead. As a result, the traditional Discounted Cash Flow (DCF) approach to valuing most businesses tends to break down (and undervalue) a “small” advisory firm (e.g., those with <$1M of revenue).įor such hard-to-value assets, an alternative approach to valuation is simply to look at the prices being set by buyers and sellers in the actual marketplace, and to simply value the business relative to its marketplace comparables. However, valuing a business whose primary assets is intangible goodwill can be challenging, especially given that the overwhelming majority of independent advisory firms are small/solo practices that generate little net profit beyond the healthy income paid to the advisor-owner to operate the business. Because the reality is that with annually recurring revenue and 95%+ client retention rates, there really is income-producing value in an advisory firm, even if it’s mostly based on the “goodwill” of clients to stick around year after year. An independent financial advisory firm can have significant value, even if the business doesn’t have any physical or intellectual property to yield profits.

Fp transitions