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.
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).
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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