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Using Valuations to Manage Your Practice

Carla McCabe
May 9, 2018

Valuations have historically been calculated as a multiple of some financial metric – whether that be revenue, EBITDA, or EBOC. But we all know there’s so much more to a firm than just its P&L or balance sheet. After all, two firms that generate the same revenue can be vastly different when it comes to how stable and profitable (i.e., desirable) they may actually be. However, when a valuation is based on more than just the financial aspects of a firm, it allows a unique opportunity to see the inner-workings of the business and what’s really happening behind the scenes and beyond the accounting books.

We believe it’s prudent to also look at the non-financial factors – such as business and client risk – to really determine the health of a firm. This includes things like corporate structure and strategy, advisor age, and infrastructure and processes, as well as client age, next gen relationships, and referral rates. It seems obvious that firm and client stability should be important factors when considering sustainability, but these are often neglected and overlooked when discussing value.

Think of KPIs as a set of gears that are all working together like cogs in a machine.

When one moves, they are all affected. The KPIs that drive your business valuation work in the same manner; they’re all intrinsically connected – a change in one area of your business can have a profound effect in another. That’s why it’s so important to understand what these underlying factors are and how they drive value.

So, what does all of this mean and how does a valuation help with practice management? Simple – when you can make adjustments to your business beyond the financials (after all, expenses are largely fixed and revenue is often predictable), you have the ability to better control how your business is viewed and valued, and improve the overall health of the practice. Whether you’re an owner/advisor, manage an OSJ, or run practice management within an organization, the following guidelines will assist you in using valuations to make your firm more efficient, stable, and profitable (read: more valuable).

  • Use the KPIs and scorecards to identify shortcomings or areas for improvement. Remove as much emotion as possible from this process and objectively look at the business. First, look at what you’re doing right and celebrate those accomplishments. Next, look at areas where the firm may be lacking (typically, the Truelytics eValuation grades lower than a B). Don’t take it personally; running a business is hard work! Choose 5-12 KPIs that you want to explore further (you may want to select those that have the greatest monetary impact on the valuation).
  • Work with a professional to get educated on your options and potential solutions. Knowledge is key and there is usually more than one available option to improve something. Your business consultant or practice management specialist, investment banker, attorney, and accountant can all be great resources when it comes to learning about potential solutions to a shortcoming. Get as educated as possible and thoroughly vet all options. Remember to take your time when making business decisions, keeping the future in mind - you don’t want to have to come back later and retrofit a poor or not properly thought-out choice.
  • Prioritize which items to tackle first. Some may be “easy” or short-term projects (such as creating a corporate structure) while others may take years to realize the hard work of your efforts (like materially changing client demographics). Assemble a rough list in the order of importance of which projects to undertake first.
  • Develop an implementation strategy. Determine the who, when, and how to effect the changes you’ve decided on. Include as much detail as possible and create several small milestones to help you reach each ultimate goal. Your business consultant or practice management specialist can be a great resource as you create the plan to accomplish your objectives. Remember that any progress forward, no matter how small or seemingly inconsequential, moves you that much closer to your end goal.
  • Monitor your progress. Regularly check-in and measure your progress. Some days it will feel like you’ve gone absolutely nowhere and that’s normal. But the beauty of KPIs is that they’re measureable and the results can often be incremental. Even the slightest change to your business (whether that’s an increase in value, decrease in DCF rate, or improved efficiency) should be acknowledged and celebrated. Quarterly reviews are recommended, but assessments should be no less than bi-annual. When you perform regular check-ins, you’ll easily be able to see how far you’ve come (which will motivate you to keep up the hard work) – or reassess what isn’t working and change course before too much time is wasted.

Most people are often surprised that a valuation can provide so much valuable information about the health of a firm, and they’re even more surprised that valuations can be used to actively manage and improve their practice. When used properly, a valuation goes well beyond putting a value on a firm – it provides a tangible tool that can be used to craft actionable steps and make improvements to your business. 

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