business valuation financial planning practice

The Definitive Guide to Valuing Your Financial Planning Practice

As a financial advisor, your practice is likely one of your most valuable assets. Whether you're considering selling, merging, or simply want to understand the true worth of your business, accurately valuing your financial planning practice is crucial. However, determining an accurate valuation can be a complex process with many factors to consider.

In this comprehensive guide, we'll explore the key elements that influence the value of a financial planning practice and provide you with a deep understanding of the valuation process. We'll cover various valuation methods, industry trends, challenges, and strategies to enhance your practice's value. By the end of this guide, you'll be equipped with the knowledge and insights needed to navigate the valuation process with confidence.

Understanding the Components of Value

Before delving into the valuation methods, it's essential to understand the key components that contribute to the overall value of your financial planning practice. These components can be broadly categorized into tangible and intangible assets.

Tangible Assets:

Client Base: The foundation of any financial planning practice lies in its client base. Evaluate the size, diversity, loyalty, and growth potential of your client roster. Long-standing client relationships and a solid retention rate can significantly enhance the value of your practice.
Revenue and Profitability: Assess the financial performance of your practice by analyzing revenue streams, profit margins, and recurring revenue. Consistent revenue generation and healthy profitability demonstrate the stability and growth potential of your business, making it more attractive to potential buyers.
Assets Under Management (AUM): The total value of assets you manage for your clients is a crucial factor in determining your practice's worth. A higher AUM generally translates to higher revenue and profitability, thus increasing the overall value of your business.

Intangible Assets:

Brand Reputation: A strong brand reputation built on trust, experience, and client service can significantly enhance the perceived value of your practice. A well-established brand can attract new clients and retain existing ones, contributing to long-term growth and sustainability.
Intellectual Property: Any proprietary methodologies, investment strategies, or exclusive financial products your practice owns can add substantial value. These unique assets differentiate your practice and can provide a competitive edge in the market.
Human Capital: The experience and qualifications of your team are invaluable assets. A highly skilled and knowledgeable team can contribute to the overall value of your practice by delivering exceptional service and driving growth.
Technology and Systems: The technology infrastructure and systems you have in place can streamline operations, enhance efficiency, and improve client experiences. A well-integrated and robust technology stack can be a significant value-add for potential buyers.
Regulatory Compliance: A practice that strives to meet industry regulations and maintains robust compliance and risk management systems can minimize potential legal and financial risks, making it a more attractive opportunity.

By understanding and evaluating these tangible and intangible assets, you can gain a comprehensive view of your practice's strengths and areas for improvement, ultimately positioning yourself for a more accurate valuation.

Valuation Methods

There are several methods commonly used to value a financial planning practice. Each method has its own strengths, weaknesses, and applicability based on the specific circumstances of your practice. Let's explore the most widely used valuation methods:

Multiples of Revenue 1 2 10

This method involves applying a multiple to your practice's recurring revenue, typically from the trailing 12 months. The multiple uses can vary based on industry standards, the size of your practice, and other factors such as growth potential and profitability.

For smaller practices generating less than $1 million in gross revenue, a gross revenue multiple (GRM) is often used. For practices between $1 million and $5 million in gross revenue, the focus shifts to earnings multiples, such as a multiple of seller's discretionary earnings (SDE) or earnings before interest, taxes, depreciation, and amortization (EBITDA).

Discounted Cash Flow (DCF) Analysis 2 6

The DCF method involves projecting your practice's future cash flows and discounting them to their present value using an appropriate discount rate. This method considers the time value of money and accounts for the risk associated with your practice's future cash flows.

The DCF analysis is particularly useful for larger practices with consistent cash flow patterns and reliable growth projections. It provides a more comprehensive view of your practice's value by considering its long-term earning potential.

Asset-Based Valuation 6

The asset-based valuation method focuses on the fair market value of your practice's tangible and intangible assets. This approach is typically used when a practice is being liquidated or when its assets are more valuable than its ongoing operations.

Under this method, each asset is valued individually, and the sum of these values represents the overall value of your practice. However, it's important to note that this method may not capture the full value of your practice as a going concern.

Market Approach 2 6

The market approach involves comparing your practice to similar businesses that have recently been sold or acquired. This method relies on finding comparable transactions and adjusting for differences in size, profitability, client base, and other relevant factors.

While the market approach can provide a good benchmark, it can be challenging to find truly comparable transactions, especially in smaller markets or niche practice areas.

It's important to note that these valuation methods are not mutually exclusive, and in many cases, a combination of methods may be used to arrive at a more accurate and comprehensive valuation.

Industry Trends and Market Conditions

When valuing your financial planning practice, it's crucial to consider the broader industry trends and market conditions that may influence the perceived value of your business. Here are some key trends and factors to keep in mind:

Technological Advancements 3 9 15

The financial planning industry is rapidly evolving, with technology playing an increasingly significant role. Practices that embrace digital solutions, such as client portals, financial planning software, and automated investment platforms, are often viewed as more valuable and future-proof.

Regulatory Changes 3 7

Regulatory shifts, such as changes in fiduciary standards, tax laws, or compliance requirements, can impact the value of a financial planning practice. Practices that are well-prepared for regulatory changes and have robust compliance systems in place may be perceived as lower-risk investments.

Demographic Shifts 3 9

The aging population and the transfer of wealth to younger generations are reshaping the financial planning landscape. Practices that cater to the unique needs of different demographic groups, such as millennials or retirees, may be better positioned for long-term growth and increased valuations.

Industry Consolidation 9 15

The financial planning industry has seen a trend toward consolidation, with larger firms acquiring smaller practices or merging to gain economies of scale. This trend can impact valuations, as larger firms may be willing to pay a premium for established practices with a loyal client base and strong growth potential.

Economic Conditions 2 3

Broader economic factors, such as interest rates, market volatility, and consumer confidence, can influence the demand for financial planning services and the perceived value of your practice. Practices that have demonstrated resilience during economic downturns may be viewed as more valuable investments.

By staying informed about these industry trends and market conditions, you can better position your practice for a favorable valuation and make strategic decisions to enhance its value.

Challenges in Valuing a Financial Planning Practice

While valuing a financial planning practice is essential, it's not without its challenges. Here are some common obstacles you may encounter:

Lack of Standardized Valuation Methods 2 10

Unlike other industries, there is no universally accepted valuation method for financial planning practices. This lack of standardization can lead to varying valuations and make it challenging to compare your practice to others in the market.

Subjectivity in Valuing Intangible Assets 6 8

Intangible assets, such as brand reputation and intellectual property, can be difficult to quantify and value objectively. Different valuation professionals may assign different weights to these assets, leading to variations in the final valuation.

Data Availability and Accuracy 3 6

Accurate and comprehensive data is crucial for a reliable valuation. However, many financial planning practices may lack detailed financial records, making it challenging to assess historical performance and project future cash flows accurately.

Client Retention and Portability 4 8

The value of a financial planning practice heavily relies on its ability to retain clients after a sale or merger. However, client relationships are often personal, and there is no guarantee that clients will remain with the new ownership or management.

Regulatory and Compliance Risks 7 8

Potential regulatory changes, compliance issues, or legal disputes can significantly impact the value of a financial planning practice. Assessing these risks and their potential consequences can be complex and may require specialized expertise.

To overcome these challenges, it's essential to work with experienced valuation professionals who understand the nuances of the financial planning industry and can provide an objective and comprehensive assessment of your practice's value.

To overcome these challenges, it can be beneficial to work with experienced valuation professionals who understand the nuances of the financial planning industry and can provide an objective and comprehensive assessment of your practice's value.

Strategies to Enhance Your Practice's Value

While valuing your financial planning practice is crucial, it's equally important to implement strategies that can enhance its value over time. Here are some key strategies to consider:

Focus on Client Relationships 4 8

Cultivate strong, long-lasting client relationships built on trust, transparency, and personalized service. Nurture these relationships by providing exceptional client experiences, proactive communication, and value-added services.

Diversify Revenue Streams 2 8

Explore opportunities to diversify your revenue streams beyond traditional investment management fees. Consider offering fee-based financial planning services, insurance products, estate planning, or tax advisory services to attract a wider range of clients and increase revenue stability.

Embrace Technology 3 9 15

Invest in robust financial planning software, customer relationship management (CRM) systems, and digital marketing tools to streamline operations, enhance client engagement, and position your practice for future growth.

Develop a Succession Plan 8 12

Implement a well-defined succession plan that outlines the transition of ownership, management, and client relationships. A clear succession plan can mitigate risks and provide assurance to potential buyers or partners.

Foster a Strong Team 8 12

Build a talented and dedicated team of professionals with diverse skills and expertise. Invest in their professional development and create a positive work culture that attracts and retains top talent.

Maintain Robust Compliance and Risk Management 7 8

Implement robust compliance and risk management systems to minimize potential legal and financial risks. Stay up-to-date with regulatory changes and industry best practices to demonstrate a commitment to ethical and responsible business practices.

Continuously Improve and Innovate 9 15

Regularly evaluate your practice's processes, services, and offerings to identify areas for improvement and innovation. Embrace a growth mindset and be open to adapting to changing market conditions and client needs.

By implementing these strategies, you can enhance the value of your financial planning practice, making it more attractive to potential buyers or partners and positioning yourself for long-term success.

Hiring a Valuation Expert

While it's possible to attempt a self-valuation of your financial planning practice, engaging a professional valuation expert is often recommended, especially for larger or more complex practices. Here are some key reasons to consider hiring a valuation expert:

Objectivity and Expertise 2 6 10

Valuation experts bring an objective and unbiased perspective to the valuation process. They have specialized knowledge and expertise in valuation methodologies, industry trends, and regulatory requirements, ensuring a comprehensive and accurate assessment.

Credibility and Defensibility 6 10

A valuation performed by a qualified expert carries more credibility and is more defensible, particularly in situations involving legal or regulatory scrutiny, such as mergers, acquisitions, or tax-related matters.

Access to Industry Data and Resources 2 6

Valuation experts have access to industry-specific data, benchmarks, and resources that may not be readily available to individual practitioners. This information can provide valuable insights and context for the valuation process.

Compliance with Standards and Regulations 6 10

Valuation professionals adhere to established standards and regulations, ensuring that the valuation process is conducted in accordance with best practices and legal requirements.

When hiring a valuation professional, it's essential to consider their qualifications, experience, and familiarity with the financial planning industry. Look for professionalswho hold relevant certifications, such as Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), or Accredited Senior Appraiser (ASA).

Valuing your financial planning practice is a critical exercise that provides valuable insights into the worth of your business and its growth potential. By understanding the components of value, valuation methods, industry trends, and challenges, you can make informed decisions about the future of your practice.

Whether you're considering selling, merging, or simply want to benchmark your practice's performance, an accurate valuation is essential. Engaging a valuation professional can ensure objectivity, credibility, and compliance with industry standards and regulations.

References: 1 https://gitnux.org/financial-planning-trends/

2 https://www.joinbookway.com/post/how-to-value-your-financial-planning-practice

3 https://www.venasolutions.com/blog/top-financial-planning-challenges

4 https://www.investmentnews.com/industry-news/news/why-millionaires-value-their-advisors-for-their-long-term-financial-planning-243447

5 https://www.kitces.com/blog/future-of-financial-advice-technology-trends-value-service-engagement-attia/

6 https://peakbusinessvaluation.com/how-to-value-a-financial-advisory/

7 https://www.commonwealth.com/insights/8-potential-risks-in-your-financial-advisory-practice

8 https://beckbode.com/blog/valuing-financial-advisory-practice

9 https://integrated-financial-group.com/resources/10-key-industry-trends-developments-for-2024-every-financial-planner-should-know/

10 https://www.moneymanagement.com.au/news/financial-planning/how-value-financial-planning-practice

Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.

Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.

business valuation financial planning practice

Valuation of financial planning practices, so, what is the real value of a financial planning firm, realistic benefits, what is your financial planning practice really worth.

This article will help you understand the best way to value your business so you can better plan for succession.

The commonly cited valuation multiples for financial planning practices of 1.1x non-recurring revenues and 2.2x recurring revenues is no longer an appropriate basis for valuation . Revenues have dropped, but expenses have not; clients have more choices, competition is greater and market projections are flat.

This valuation ignores the quality of the revenues being generated. If the practice has a 30% gross margin, its annual profit from operations would be $127,500. Repayment of debt on the purchase price of $750,000 over a five-year term would be $150,000 per year.

It can be argued that profit earned under the existing owner might not take into account the future potential of the acquired assets or the cost savings of the existing owner leaving the practice, but most owners do not leave immediately. Instead, they stay on to provide “continuity” and draw a salary or fees for some period. If we assume the seller wants to stay on for a year and the transition results in 90% retention, profit would be reduced substantially. Available free cash flow might not be sufficient to handle the debt repayments at this valuation level. It can be seen that the deal is negative coming out of the gate.

Several industry reports suggest that a debt-funded sale is simple and beneficial. What they fail to point out is the risk of something going wrong. When it does go wrong, it goes quickly and sometimes catastrophically. The cash flow issues are obvious, but profitability is also affected by challenges to morale, organizational stability and service models.

In the example of a practice with $500,000 GDC and 85% payout from the BD, assuming 6% compound growth and a modest discount rate of 20% over a 10-year period with a terminal valuation , the firm would be worth approximately $620,000.

This valuation increases the IRR for the buyer by 50%. In the model above, the reduction in the asking price from $750,000 to $620,000 pushes the IRR to 11% from 7%, which is the difference between making it attractive or not because the buyer has other ways to make 7% on his/her money.

You may reply, “But there are 50 buyers to every seller.” If this was true, practice valuations would be soaring. The fact is that many “interested buyers” are kicking tires. They do the math and recognize they cannot buy a practice that is priced above a point where cash flow will service the debt.

This reassessment of valuation is important to you because a debt-financed acquisition is leveraged and uses the firm’s cash flow to pay down the debt. If the debt cannot be paid because the firm bankrupts itself, the outcome benefits neither the seller nor the buyer. The last thing clients want is to be involved with a firm where the senior parties are in court! It is better to value a practice on its predictable cash flow, add a shared benefit bonus for the seller if the firm does well under new management, and enjoy a successful succession.

Buying practices and assets is a proven method for developing a financial services firm and it serves the industry well. Being realistic, rather than optimistic, about the value of our practices benefits all parties involved in the transaction. We have to recognize that our valuation models should be based on realize-able cash flow, not simply notional historical multiples.

Related Terms

Valuation Approach
Enterprise Value
Free Cash Flow
Working Capital Holdback
Internal Rate of Return
Non-Cash Working Capital
Middle Market
Multiple Accretion
TTM Multiple

Written by Allen Duck

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What Your M&A Transaction is Missing: How to Humanize the Transaction

By: Exit Planning Institute

The Pathway to Deeper Deal Flow

An Exploration of the Relationship Between Financial Advisors and M&A

How to Keep Your Deals from Falling Through

What Is My Practice Worth? What You Need to Know About Value and Valuation

Journal of Financial Planning: November 2017

Ryan Grau, CVA, CBA, is the valuations director and a principal for FP Transitions . He is an authority on the topics of value, valuation, and business continuity planning across multiple industries.

What is my practice worth? This is a question that every independent financial adviser should ask, or has asked, at one time or another. Given that the value of a fee-based advisory practice is often the largest asset that most advisers own, it is a good question in need of good answers.

Countless valuation services and tools are offered up to help answer this question—some good, some bad. Very few business owners understand the valuation process, myriad decisions, and judgment calls necessary to arrive at a value. When it is time for you to determine the value of your life’s work, you need to understand certain value, and valuation, fundamentals so that you can get the right answer from the right expert every time.

The starting place for most advisers who need a formal valuation is this simple mantra: purpose, standard, approach, and method. These are the key starting points in every valuation engagement. Any time a business appraisal is needed, the standard of value, approach, and method(s) used for estimating value should be tied directly to the purpose or reason that the valuation is being conducted. When you decide to sell your vehicle, for example, standards of value include both trade-in and private-party values, among others. Given the specific purpose (you want to sell your car), both values are correct even though it is the same vehicle. Still, only one standard is applicable based on the party you plan to sell to. This same concept applies to business appraisal valuations.

Value is a function of purpose, and the answer is not universally applicable to every situation. Why have your practice valued? The most common reasons include:

Non-tax valuation: general knowledge, reporting to an owner, buyer, investor, or judicial authority in cases of:

Sale or merge with a third-party
Internal sale
Dissolution, either marital or corporate
Damages and other disputed matters

Tax valuation: reporting value to a tax authority in cases of:

Charitable contributions
Transfers to related parties
Grants and options

You need to articulate the answer to your chosen appraiser in order to determine the standard of value to be used, the approach (or approaches) to take, and the methods to be used. Incorrect assumptions regarding your purpose will yield an incorrect valuation result.

Any time you plan on making a business decision relating to the value of one of your largest assets, you should seek the assistance of a professional business appraiser (see the sidebar on page 27 for tips on doing so). When selecting an appraiser, ensure they have a thorough understanding of the financial services industry and that they have access to industry-specific, private-party transaction data. Most important, the appraiser needs to have a thorough understanding of your purpose and who will be on the receiving end of any value results.

The most common reason to value a practice is for mergers and acquisitions. The next most common reasons are divorces, internal sale of stock, and gifting/transfers to related parties. Depending on which purpose is applicable to your specific needs, the resulting value may vary significantly. The reason for the differences in value results from:

The type of property being valued. Is it assets or stock?
The standard of value. Value to whom and under what assumptions?
Is the valued interest a controlling share or not?
What is the level of marketability of the subject interest? Is it liquid?

For example, the most probable selling price of a 100 percent controlling interest of the assets of a practice being valued for the purpose of selling to a third-party in an arm’s length transaction, where the majority of the purchase price is financed over five or more years, will be valued higher than the fair market value of a 10 percent minority, non-controlling, non-marketable interest in the equity of the same practice on a cash or cash equivalent basis for the purpose of gifting stock. The delta between these values is much greater than a pro rata portion of the 100 percent interest. To clarify why, let’s explore how standards of value affect the value of your practice.

Although many standards of value are applicable to the appraisal of a business interest, the two most common standards in the financial services industry are fair market value and most probable selling price.

Fair market value. Fair market value is required when valuing shares and equity of a closely held practice for IRS/tax-related matters. The IRS wants to know what the cash value of the shares or units are worth. Often, financial advisers assume that a 10 percent interest in their company’s equity on a cash basis is worth a pro rata portion of what they could sell their practice for in the open market. Rarely is this the case. (Fair market value is also applicable when opining on the equity value of a business interest for a divorce, but this varies per jurisdiction.)

The term “fair market value” is one of the most commonly misunderstood and inaccurately used valuation terms. Of the last 5,000 practices we have appraised, valued, or offered opinions on, fair market value has almost never been an applicable standard of value for the purpose of valuing a practice when selling to a third-party in an arm’s length transaction; especially when the seller is providing post-closing consulting, an agreement to not compete, and is willing to finance the majority of the purchase price.

The definition of fair market value according to the International Glossary of Business Valuation Terms is: “The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” This definition is nearly identical to the one found in IRS Revenue Ruling 59-60.

The often overlooked, but key issue is that fair market value is considered “value in exchange” on a cash or cash equivalent basis. In other words, transferable property is sold in exchange for something of value, namely cash. This is logically inconsistent with how a typical financial advisory practice is bought and sold: less than 5 percent of all sales are completed on a cash basis, and the industry standard pricing multiples assign a value attributable to non-transferable property such as (1) the seller’s agreement to provide post-closing consulting to help transfer the assets (a consulting agreement); and (2) an agreement to not compete or solicit the clients subject to the purchase agreement. These are services that only the seller can perform; they are not “transferable property.” By ignoring these facts, a statement of fair market value could be inaccurate by as much as 15 to 25 percent which—as you can imagine—is an issue when the opinion of value is used for tax, divorce-related, or disputed matters.

It is worth noting that this standard of value is more of an academic standard than the reality of what an adviser could expect if he or she actually sold their practice to a third party. Most buyers and sellers who participate in an open marketplace are under some level of compulsion to buy or sell. If compulsion were not present, it stands to reason that a seller would never accept anything less than absolutely favorable deal terms at the highest value from his or her point of view. The inverse of this argument is applicable to buyers as well.

Most probable selling price. This standard of value best describes the value that a seller could expect to receive if he or she sold their practice to a third party in the financial services industry. It is defined by the International Business Brokers Association (IBBA.org) as: “The price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller considering compulsion on the part of either buyer or seller, and potential financial, strategic, or non-financial benefits to the seller and probable buyers.”

The most probable selling price reflects the reality of the marketplace. For the sale of financial service practices, this standard of value assumes the sale, transfer, or acquisition is accomplished using a standard tax allocation strategy for the sale of capital and personal assets, resulting in the majority of the value ultimately being realized at long-term capital gains tax rates (presuming an adequate holding period for the capital assets). This value further assumes a 100 percent transfer of ownership interest in the customer list and files, personal and enterprise goodwill, consulting agreements with the seller(s), and a non-competition and/or non-solicitation agreement(s) from the seller(s). The majority of the purchase price is expected to be seller financed over a four- to six-year period at interest rates that are substantially lower than what third-party lenders would require.

Both fair market value and the most probable selling price can be determined using either the income or market approach (see below), and a professional business appraiser should be able to produce similar estimates of value using either. The key to successfully determining value from each approach is understanding the standard of value inherently produced by each approach and the necessary adjustments required based on the standard of value for the given purpose.

An income approach, for example, is going to produce a value consistent with fair market value. If this approach is used for the purpose of valuing a practice that is going to be sold to a third party in an arm’s length transaction—especially when seller financing is involved— adjustments need to be included to account for the cost of seller financing and any additional services or agreements a seller is willing to provide post-closing, such as a consulting agreement, a non-compete/non-solicitation agreement, etc.

A market approach, relying on the use of private company transactions in the financial services industry, will most often produce a value consistent with the most probable selling price (depending on the source of the data). Using this approach for an opinion of fair market value requires an analysis of the deal structure of the transactions.

The appraisal discipline has three generally accepted approaches to value: asset, income, and market approaches. These approaches are broad categories for various ways to value a business. Under each of these approaches are commonly used and accepted methods of valuation. Without an understanding of the purpose for the valuation or the appropriate standard of value, the correct application of these approaches is limited to a best guess.

Of the three valuation approaches, the easiest to understand and the most commonly used is the market approach. The asset approach is rarely used in our industry due to the lack of physical capital assets needed to produce revenue. The income approach is the most complex approach to value a closely held practice.

Market approach methods. The market approach has three common methods: (1) Guideline Public Company Method (GPCM); (2) the Public Company Transaction Method (PCTM); and (3) the Guideline Private Company Transaction Method (GPCTM).

GPCM and PCTM are often used to value financial service practices by appraisers who do not have access to comparable private company transaction data. These methods compare the practice being valued to the enterprise value of public companies in the same industry, but with market capitalization rates 20 to 40 times the size of the typical practice. In other words, these methods rely on the possibility that closely held financial service practices will sell for a price similar to that of a publicly traded C-Corporation.

Alternatively, GPCTM develops a value based on a group of five or more transactions of closely held practices that sold in a free and open market. The results from this method are grounded to previous transactions of similar companies and arguably provide the most reliable estimates of value for most practices in the industry. Unfortunately, the usefulness and accuracy of the GPCTM approach is limited to the number of transactions and quality of the information available to the appraiser.

Transaction data on financial service practices is often not readily available through industry databases such as the Institute of Business Appraisers, Bizcomps, Pratt’s Stats, and PeerComps. Moreover, available information is typically limited to one year of financial statements that may be much older than the actual transaction date. The best source of data when using the GPCTM for valuing a financial services practice can be firms that provide certified valuations, business brokerage, and consulting services.

Income approach methods. The income approach is a suitable approach for allowing the appraiser to forecast income and expenses, and project the future economic benefits that will flow to the owner(s). The two methods that fall under the income approach are stylistically similar, but contain underlying assumptions that make them mutually exclusive.

The first method, capitalization of earnings method, makes the assumption that growth of the practice or business will be uniform into perpetuity. This assumption manifests itself through one long-term sustainable growth rate that is used to capitalize a benefit stream, typically net cash flow to invested capital.

The second method, the discounted cash flow method, is based on the concept that the growth of the company will vary for a determined forecast period, typically five to 10 years. When performed correctly, this method forecasts the practice’s revenues, expenses, capital expenditures, and working capital requirement of the business until it reaches maturity. These forecasts are then discounted to their present value.

It is important to understand that the value produced using either method from the income approach will produce a cash or cash equivalent value consistent with the definition of fair market value. This can be observed by analyzing the sources from which the discount rates are developed—publicly traded C-Corporations. When was the last time you saw a market cap rate quoted at a price other than cash? When was the last time you purchased stock of a publicly traded company and the quote included anything about how you might finance the purchase?

If the source of the discount rate is derived from transactions of minority shares in a freely traded marketplace, then the value calculated from this apporach will represent a marketable, liquid interest. The very nature of a closely held company is a marketable, illiquid interest, and, therefore, is less valuable than a marketable liquid interest. As such, an additional discount to reflect the decreased liquidity of a closely held company should be applied when an income approach is used. This is common practice among business appraisers who are familiar with the use of the income approach. However, it is often skipped in models developed by those who do not specialize in the appraisal profession. Omitting this step means value may be overstated by as much as 25 percent. Appraisal pundits Shannon Pratt, Gary Trugman, Jeffrey Jones, and Rand Curtiss, all accredited by the American Society of Appraisers and the Institute of Business Appraisers, reached this conclusion in a conference sponsored by Business Valuation Resources. 1

No single valuation approach and method works every time in every situation. If you’re told otherwise, it is usually by someone selling the one approach that they understand and that can be sold profitably. For this reason and others shared in this article, it is highly recommended that advisers wishing to sell their practices seek the professional assistance of a business appraiser or certified valuator who can employ the appropriate approaches and methods that tie value directly to the adviser’s purpose. This step is where the appraiser can help the adviser save money by accurately identifying the necessary scope of work to provide a defensible value.

Opining on the value of a financial services practice is contingent on the appraiser and on the adviser seeking to understand how the concepts of purpose, standard, approach, and method fit together to provide an accurate view of their practice’s value for a specific situation.

See Business Valuation Resources' "Valuing Small Businesses" (teleconference, Dec. 16, 2004.

Tips for Finding an Appraiser

A practice’s value is ultimately decided by a willing buyer and a willing seller. However, without the proper application of the tools shared here by an accredited appraiser who understands how to apply them correctly for the adviser’s specific purpose, you cannot expect to receive a beneficial outcome. The use of unaccredited appraisal services or an online calculator to solve the needs of a specific purpose is often a fool’s errand.

The valuation profession, like the financial advice profession, requires a higher level of qualification, education, and experience. To find an accredited appraiser, look for the following designations:

Certified Valuation Analyst ( CVA )
Certified Business Appraiser ( CBA )
American Society of Appraisers ( ASA )
Accredited in Business Valuation Credential ( ABV )

Using a professional appraiser doesn’t mean you need to pay a king’s ransom to have your practice valued. Just be sure to speak with the person or firm providing you the appraisal to ensure you have an understanding of the scope of work given your specific purpose.

Journal: November 2017

More from this issue, are your clients not spending enough in retirement, a fiduciary approach for clients who need long-term services and supports, need marketing ideas ask your target audience, related events, august 21, 2024 quarterly education meeting, november 20, 2024 quarterly education meeting.

The Methodology Behind a Financial Advisor Practice Valuation Calculator

How much are you worth? It’s a question advisors spend every day discussing with their clients, often without considering that question for their own firm. That’s where a valuation comes in.

The most common reason advisors seek a valuation is to prepare for a sale or merger of their business . There are other motivations to proactively pursue a valuation, such as granting internal equity to next-generation advisors or a business partner .

Yet you don’t have to be making a big change to benefit from a valuation. In fact, one of the best purposes for a valuation is simply to get into the habit of benchmarking your business. By tracking key metrics on an ongoing basis, you can set goals and measure your progress – for example, aiming to reach a certain percentage increase in net new assets year over year.

Carson’s Firm Valuation Calculator is a useful tool to delve deeper into your business, obtain an initial estimate of your market worth and more keenly understand your opportunities for growth. But what’s the methodology behind a financial advisor practice valuation calculator?

Let’s look at the various metrics that comprise a valuation and what they can tell you about the health of your business.

Six KPIs That Can Help You Evaluate Your Business

Carson’s Firm Valuation Calculator consists of six quick questions designed to give you a clearer picture of your firm’s market value . Here are the factors it explores, along with a brief summary of the insight each metric offers.

1. What assets under management (AUM) does the firm represent?

For this metric, it’s important to note Carson’s Firm Valuation Calculator specifies AUM, rather than assets under administration (AUA). That’s because AUM is a better indicator of recurring revenue as the amount you’re actively managing on an ongoing basis.

There’s no question that offering comprehensive financial management requires a holistic view of a client’s entire financial picture, which is the argument for AUA. However, including those assets that are outside your purview, such as commission-based and 401(k) investments, provides an inflated estimate that may not accurately reflect the reality of your firm’s revenue.

Since there is often confusion between AUM and AUA, it’s vital to distinguish between the two to make the data as accurate as possible.

2. What percentage of the AUM is advisory business?

This metric helps an outsider evaluate where your revenue and profit are derived from, giving preference to the recurring revenue that comes from fee-based advisory services. A potential suitor will also assess whether your accounts are primarily in growth mode or distribution mode, where clients are drawing down on retirement savings.

3. What is the gross revenue of the firm?

While this seems like a straightforward metric, annual revenue is not the sole factor determining your profitability. Although valuations used to be considered as a straight multiple of revenue, that methodology is now largely outdated. Today’s buyers have become more sophisticated as increased data availability allows valuations to be more accurate. Profit alone can offer a top-line look, but the devil lies in the granular detail. The goal is to buy for the future, not just today.

One metric to consider is earnings before interest, taxes, depreciation and amortization (EBITDA), a common measure of profitability that gives a snapshot of a company’s cash flow. However, there are factors that can throw that off.

For example, consider a firm that has recently been on a hiring spree to bolster the team with top talent. Due to those ancillary expenses, the EBITDA might not look as favorable at a glance, yet when examining the particulars more closely, they might discover a business with strong AUM and good revenue that has wisely staffed up for its next stage of growth. So maybe they have $200 million in AUM and, with this expanded team, they’ve built the infrastructure to support $400 million.

If Carson were making this valuation, we wouldn’t punish the business for what might appear to be temporarily relatively low profitability because we see the benefit: The buyer is unlikely to need to invest time and financial resources to source a deep pool of talent.

On the other hand, if we see that higher-than-usual expenses can be traced to an elite advisor and one operations team member, we might question how quickly that firm will be able to grow, or the repercussions if that advisor were to defect.

The point: The character of expenses is what drives the multiple, and low profitability doesn’t automatically equal a low valuation.

4. How many clients does the team serve?

Again, this is going to be a metric that will take some context. The number of households served can be a great indicator of growth and potentially serve as a powerful vehicle for future referrals. Yet it doesn’t tell the whole story.

Let’s say a firm has $200 million AUM, but the average account size is $100,000. That’s a lot of clients who probably require a considerable amount of service. It can be difficult to achieve economies of scale without larger clients, given that smaller account sizes often indicate clients who need more education. On the flip side, an advisory firm that serves just a few large clients could be at risk if these clients (or their beneficiaries) depart.

5. How many employees are on your team?

This metric helps determine the productivity of each team member, which ultimately has an important effect on profitability. As mentioned before, firms that have staffed up for future growth can be appealing to a prospective buyer, especially if they are actively acquiring new AUM.

6. What is your ownership percentage?

The more of the business you personally own, the larger your ultimate payout. Often, a buyer may prefer a firm where one owner isn’t dominant. That could foretell client defections if their prominence was the reason for the firm’s success.

What the Calculator Doesn’t Tell You

At first glance, arriving at a valuation seems like an easy exercise – just plug in these six metrics, and voila, an answer. Yet, once you look deeper, it’s easy to see how subjective it is and the high level of nuance in otherwise straightforward numbers.

While the valuation calculator offers a fine 30,000-foot view, you need a more granular perspective to pinpoint an accurate valuation. That’s Carson’s specialty.

We realize that much of a firm’s value is derived from the goodwill it has built with clients. This is why we want to spend time immersing ourselves in the details of your practice and how you run it. Then we can determine the story behind your profitability and whether you are poised for future growth.

How engaged are you with your next-gen clients? Have you increased your marketing budget to attract net new assets? These are the types of expenses that a smart buyer will appreciate, as they can be applied toward future growth.

Certainly, every advisor wants to see the most value they can, so it’s vital to consider how valuations are derived. It’s a bit like how comparison figures are used in real estate to help value a home.

Everything about two houses might look equal – a similar size and layout – but one might be priced higher because it was far better maintained, with lavish upgrades. That’s why advisors might hear of a firm being valued on a huge multiple and be puzzled when their firm doesn’t garner the same.

There’s no question valuations are complex, and since each situation is unique, now is the time to burnish the KPIs that matter. Consulting Carson’s Firm Valuation Calculator can be a crucial benchmarking exercise that allows you to set goals for the upcoming year. You can then prioritize the elements that will ideally drive higher enterprise worth down the road.

Are you ready to talk to Carson about how to fine-tune your advisory business to prepare for growth? Contact us today to learn more .

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The Essentials of Succession Planning for Financial Advisors

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In this month’s Know Your Worth livestream, Carson’s Michael Belluomini, VP, Mergers & Acquisitions, and Jeff Harris, AVP, Mergers & Acquisitions, welcome Laura Delaney, Vice President, Practice Management & Consulting, at Fidelity. They’ll go through a macro overview of the M&A landscape, including how 2023 shook out, the trends so far this year and more. …

Know Your Worth | Tray Wiltse

In this month’s Know Your Worth livestream, Carson’s Michael Belluomini, VP, Mergers & Acquisitions, and Jeff Harris, AVP, Mergers & Acquisitions, welcome Tray Wiltse, Managing Director & Wealth Advisor at Carson Wealth in Kansas City. They’ll go through the process of Tray selling his book of business and the factors that went into his decision. …

Know Your Worth | Mike Wieger

We’re diving into expert insights, sharing real-life case studies, and giving you practical tools to boost your M&A strategy and and understand the options for succession planning. Stay ahead in the fast-paced world of wealth management mergers and acquisitions with our engaging livestream sessions.

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Valuation Multiples for a Financial Advisory

Nov 19, 2020 | Business Valuation , Financial Advisory , Small Business

Financial advisory firms are fascinating businesses. One of the “quick and dirty ways” a valuation expert values a financial advisory firm is using multiples. A valuation multiple is like a ratio. A ratio compares two things to each other, for example, one of the more commonly used ratios in valuation is a revenue multiple. A revenue multiple compares the revenue of the company, with the implied value of the company. The calculation for these multiples come from other firms that recently sold on the open market. (The calculation for these other firms is Sale price/Revenue.) A valuation expert can then apply these multiples to your company to give you a range of value .

For example, if a company has $500,000 in Revenue, and transacts at a 0.5x revenue multiple, then the business would be worth $250,000. ($500,000 time 0.5) On the contrary, a 2.0x multiple would imply the value of the company is $1,000,000. ($500,000 times 2)

Peak Business Valuation , business appraiser Texas, works with numerous practices that are looking to sell or expand their book of business. As we work with multiple financial advisory firms, we have come to recognize some of the common multiples financial advisory firms transact and are valued at. We are happy to answer any additional questions you may have. Reach out by scheduling a free consultation.

***Disclaimer: These multiples have been provided for educational purposes only. As such, the information provided does not constitute valuation advice and should not be acted as such. These multiples do not represent the valuation opinion of Peak Business Valuation or any of its valuation professionals. Instead, you should seek the guidance and advice of a qualified business valuation professional with respect to any matter contained in this article.

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Most Common Industry Multiples

The two most common multiples to look at include revenue and EBITDA multiples. A multiple of SDE ( Seller’s Discretionary Earnings ) is not as common as an EBITDA multiple. The reason why an SDE multiple is not as common as an EBITDA multiple goes back to one of the foundations of business valuation. This has to do with the valuation being completed on the premise of a hypothetical sale.

A “hypothetical sale is one that takes place between a hypothetical willing buyer and a hypothetical willing seller.” In this hypothetical situation, the buyer is most likely to be a financial advisor with an already established firm that is looking to increase their book of business with the acquisition of another book of business. As such, the buyer generally already takes a form of compensation from their current book of business. And, therefore, would not take an additional salary from the book of business they are acquiring. As such, EBITDA and SDE are generally the same metric for this exercise. Therefore, revenue and EBITDA are the most common multiples that Peak Business Valuation , business appraiser Texas, recognizes in the industry.

Revenue Multiple

Average Revenue Multiple Range in 2020: 1.9-3.0x

According to our data, in 2020 financial advisory and investment management companies transacted between a 1.9-3.0 average revenue multiple. To derive an implied value of a business, apply the multiple by the most recent 12-month period revenue. The calculation is as follows:

Revenue X Multiple = Value of the Business

For instance, if a financial advisory firm generates $400,000 in revenue and transacts at a 2.54x multiple, then the business value is worth approximately $1,016,000.

$400,000 X 2.54x = $1,016,000

This calculation is straightforward. However, most financial advisory firms do not transact wholly on a revenue multiple. The reason being a revenue multiple does not consider the operations of a business. As such, this multiple is generally not the best indication of value. If a revenue multiple is relied upon, it is usually relied upon in conjunction with a cash flow multiple. It is important to look at cash flow multiples because cash flow multiples consider expenses that impact the cash flow. For instance, rent, operating expenses, and salaries.

EBITDA Multiple

Average EBITDA Multiple Range in 2020: 3.3-4.15x

The average EBITDA multiples for financial advisory companies in 2020 range between 3.3-4.15. Apply this multiple to the EBITDA of a business to derive an implied value of the business. The calculation is as follows:

EBITDA X Multiple = Value of the Business

For example, a financial advisory firm has an EBITDA of $275,000 and transacts at an EBITDA multiple of 3.71x. Using the above metrics, the financial advisory firm is worth approximately $1,020,250.

$275,000 X 3.71x = $1,020,250

The EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses.

As you can see, in this example both approaches to valuing a financial advisory firm give us similar implied values. However, these multiples are not always the best way to value a company, they are simply rules of thumb. These multiples are also based on what Peak Business Valuation , business appraiser Texas, has seen in the last few months as we have worked with numerous financial advisory firms. There are many more complex details that affect the valuation of a Financial Advisory firm including value drivers for a financial advisory.

Sometimes, when circumstances warrant, a much lower or higher multiple is appropriate. For more information check out our blog on Valuing a Financial Advisory , How to Value a Financial Advisory , and Value Drivers for a Financial Advisory Firm .. Or reach out with questions! Peak Business Valuation , business appraiser Texas, is always happy to help. Schedule your free consultation below!

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Practice Management

Key Steps To Building A Great Financial Planning Practice

As a financial planner , building your own advisory practice requires hard work and hustle. There is plenty of competition. According to the Bureau of Labor Statistics , an estimated 263,000 personal financial advisors were employed in the United States in 2019, and an additional 11,600 are expected to join the ranks by 2029.

So what's the best way to stand apart from the crowd and establish a successful practice? Try these tips from advisors who have years of experience in the field — and who have learned via trial and error what works and what doesn't in the financial planning industry.

Key Takeaways

One way financial planners can establish themselves is by finding a market niche, be it female entrepreneurs, widows, or dentists.
It also helps to understand each client's mission, vision, values, and goals.
Volunteering in the community is a great way for financial planners to build relationships that may one day turn into a client relationship.
Finally, financial planners should not overlook the needs of young people, who stand to inherit trillions of dollars in assets in the coming years.

Find Your Market Niche

Pamela Plick , a Certified Financial Planner (CFP) with more than 25 years of experience, found success as a "money mentor to women." Her practice focuses on providing women with the education, strategies, and tools they need to become more financially confident and secure.

"As financial planners, we cannot be all things to all people," Plick says. "By targeting a niche, you become an expert in providing solutions for this particular group."

For example, Plick says you can choose to work with female entrepreneurs , widows, or dentists, or the niche can also be based on location. "Or, you could target retirees in a certain gated community or country club," she says.

Plick also advises financial planners to concentrate on what's important and what you are good at and delegating or outsourcing the rest. "Focus on important tasks like marketing, networking, and meeting with clients," she says. "If you can, outsource the administrative tasks."

Understand Your Client's Mission, Vision, Value and Goals

Leonard Wright , wealth management advisor at Northwestern Mutual, has been a financial planner since 1995. He realized his calling after a one-hour conversation helped a former employee save for a home and retirement .

Good financial planners, Wright says, get to know their client's mission, vision, values, and goals. "While they may not know them specifically, it is our job to bring them out," he says.

"If the planning and advice related to the planning does not connect to the client's mission, vision, values, and goals, the client will migrate away. If the client does not understand why the advisor makes recommendations for their benefit, they will wonder why the advisor does what they recommend and have an instinctive emotional reaction to seek someone that understands them."

Get Involved With Your Community

Steven Kolinsky , who founded Kolinsky Wealth Management in 1982, focuses on the client relationship and not the investment product. He advises getting to know your community and getting involved in your town.

" Being generous with your time and talent in your community raises your profile and lets you get to know the people around you," Kolinsky says. "We recently had a meeting with a young couple who was not ready to invest, but was looking for advice about their financial parameters in buying their first home."

Kolinsky says that connecting with local Certified Public Accountants (CPAs) is a great way to improve your assets under management .

"A great deal of business has been referred to us through the genuine relationships we have cultivated with CPAs, showing them how we do business and that they can entrust their clients to us. These relationships have taken time to build, but have been mutually beneficial."

Aim for Younger Clients

There's a dramatic shift in assets underway, and it's trending toward younger investors. Coldwell Banker Global Luxury estimated that Millennials will inherit $68 trillion in assets by 2030, increasing their wealth by five times what it is today.

"The key takeaway is servicing the younger generation doesn't have to dramatically change an advisor's practice management and recommendations," says Jill Jacques , global financial services lead and partner at North Highland. "Instead, it's all about incorporating engaging online and in-person tools that will create a two-way conversation to stay relevant to evolving audiences."

Jacques recommends that financial advisors build a younger audience by courting them on social media .

Prune Your Client List

When it comes to maintaining a roster of clients, more clients doesn't necessarily translate into more income. While it's true that financial advisors just starting in the business need to add clients to grow their revenue, the highest-income earners serve fewer clients, not more.

Financial advisors who earned less than $150,000 annually had 167 client households on average, according to a 2012 study from CEG Worldwide. Those earning between $150,000 and $500,000 annually had an average of 225 clients, while those earning between $500,000 and $1 million had 240 clients on average. But once financial advisors top $1 million in annual earnings, the number of clients they serve drops off significantly, to 179 on average.

Having fewer clients allows financial advisors to give high-net-worth individuals special attention. And as the numbers suggest, less is actually more: the highest-income earners had an average of 83 clients who had at least $1 million in assets invested with them.

The Bottom Line

As the above experts show, working as a financial planner can be both personally and financially rewarding. Building a better financial advisory practice is all about focusing on a few game-changing steps and doing them well.

"If you are knowledgeable about the products you recommend, continue to educate yourself on the investment industry, and always put your clients needs above your own, that's a great head start," Kolinsky says.

Beyond that, be creative, get out there in the community and online, and build your own unique financial advisory brand — one that keeps you a step or two ahead of your competition.

U.S. Bureau of Labor Statistics. " Personal Financial Advisors ."

Coldwell Banker Global Luxury. " A Look at Wealth 2019: Millennial Millionaires ," Page 2.

CEG Worldwide. " Best Practices of Elite Financial Advisors: 2012 Report ," Pages 12-14.

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Beyond Revenue: 8 Determinants of Valuation for a Financial Advisory Business

If you’re thinking you’d like to sell your practice at some point, you’ll want to know what it’s worth. As a prospective seller, it makes sense to get a valuation from a third-party professional valuation firm, and to update it periodically. A big chunk of a third-party valuation is based on revenue. Let’s be clear here, revenue is an essential component of the valuation, but there is more to the story than revenue.

As prospective buyers - my business partner, Ben, and I have purchased several practices over the past decade. We have learned that while a professional valuation is helpful, we also like to look more closely at several factors that may or may not be spelled out in the valuation report.

Here are 8 additional aspects of a practice that we like to investigate. Some of them seem obvious, but don’t underestimate them – it’s easy to overlook these things, so it’s worth paying attention.

8 Questions When Considering Buying or Selling a Financial Advisory Practice

1. is it real growth or are you simply riding market trends.

When we look at the practice over the past 3-5 years, a buyer will want to see that you have been growing your practice, as opposed to relying on the markets being up. Say your practice is up 20% - how much of that is attributable to your bringing in new assets, versus simply riding the rising markets?

Our firm, Beck Bode, is a growth company and as such we want to acquire companies that have historically shown the ability to bring in and grow assets regardless of current market conditions. Stale practices are not exciting or desirable to us. Any practice that is not growing actively, in our book, is a dying practice. If the practice isn’t growing, we are going to lower our overall margin on the acquisition. That’s a problem we don’t want to have.

2. Is Your Client Base Diversified?

Who your clients are contributes a lot to the value of the practice. Any buyer would want to know the profile of the client base. Even so, this is tricky, because what looks like a solid client base on paper isn’t always so in reality. We like to drill down into specifics. How many high-net-worth clients do you have? What is the age distribution across your entire client base? What portion of your clients are actively accumulating assets, versus how many are drawing down on their accounts?

While in our industry it’s common to only go after big prospects, some of our largest clients today started out with small IRA or 401(k) rollovers. They might have had no more than $20,000 or $25,000 to begin with. But they've grown with us over time, and they could be our most valuable clients now because they’ve been with us for 20 years and hopefully for another 20, 30 or more.

On the one hand it’s nice to have clients who are close to retirement, because that’s when they are saving the most. But you can’t simply look at a business based on today. Anyone who is at or near retirement age will be looking to access their wealth soon. That means they will want to live off those assets, requiring them to take a distribution. You need fresh money coming in the door.

A diversified client base – in terms of age and life stage – will affect the value of your practice.

3. What is the Longevity of Your Client Relationships?

Client longevity indirectly and directly affects how we view the value of a practice. Clients who have been around for a while have shown that they trust your guidance and that they are loyal to the practice. In our experience, longer term clients tend to stay with the firm even post acquisition. This is important, because no buyer wants to buy a practice only to watch clients leave right after the deal closes.

The savvy buyer will want to have to understand the nature of your relationship with your clients – how will they react when the original owner is no longer in the picture? These are tough questions without hard and fast answers.

Obviously, the handoff from seller to buyer needs to be good and carefully planned . In general, practices with higher client tenure will have higher client retention post acquisition.

4. How Are Retirement Distributions Affecting Your AUM?

In an ideal world, buyers look to buy practices that are either roughly equal on distributions versus contributions, or skew higher toward contributions. Both indicators signal that the practice will be a money maker. (Of course, there are many other factors at work.) Money-making firms will be valued higher, naturally.

A smart buyer will look for tranches of clients in your practice; some of the clients need to be younger, perhaps even starting out, some need to be in their 30’s and 40’s, and some need to be in their 50’s and 60’s and above. The older clients typically provide the wealth you need to build a practice, but the younger clients bring the assets that you need to continue to grow your business. If you don’t grow the younger segment, your practice can become stale because at some point in time you will be sending out more distributions than you are going to be receiving contributions.

The amount of dollars that are leaving the practice in the form of RMD (Requirement Minimum Distributions) says a lot about the phase of growth that your practice is in. Just as important is how many clients are set up for automatic contributions into their investment accounts. That, too, tells a lot about the value of the practice.

5. How Consistent is Your Fee Structure?

Every RIA will have a unique fee structure; in my opinion there is no perfect fee or fee structure. However, when assessing the value of a firm, the fee structure does play a role. We have found that sometimes advisors are discounting their fees so much that it devalues their firm in the eyes of a prospective buyer. If you are an advisor who has given into fee compression you run the risk of reaching a fee threshold that’s so low that an acquirer may say your firm is simply not worth the money. Firms that over-discount to attract or retain clients aren’t necessarily doing a good thing for anyone.

On the other hand, a consistent fee structure helps improve the value of the business. I’d advise that whatever you write in your ADV your fee is, stick to it. Try not to make exceptions to your own rule, don’t discount fees for certain people. If you do find that you have been inconsistent in structuring your fees, it helps to have a clear explanation as to how they are different, and why.

6. Are The Buyer and The Seller’s Investment Strategies in Alignment?

If the buyer is looking to absorb your practice into their own, it’s important that the investment strategies of both firms be at least compatible. You may say what does this have to do with the value of my practice? Well, a compatible investment strategy may make your practice more desirable and therefore more valuable to a buyer who is seeking that profile. Ultimately, buyers want to invest in practices with high retention rates and any incompatibility will again impact retention.

7. How Strong is the Referral Network?

In a perfect world, new clients come by organic referral from your very best clients who refer you because they believe in you and appreciate the service you provide. A buyer will want to see healthy referral activity, not only because that brings in new assets to the firm, but because it says a lot about the overall health of the practice. It says that you have a solid service model, delivered by a trustworthy and competent team, that your clients are loyal to you, that they are willing to share you with their friends, their family and extended network. All these things contribute to increasing the value of your practice.

8. What is the Level of Client Engagement?

Speaking of service, service metrics are a great indicator of the value of a practice. A seasoned buyer will want to know how you are communicating with your clients. If you have close relationships with your clients, it means that you’re likely communicating with them on a more regular basis, not just doing an annual review.

When we assess a firm, we will look into their customer relationship management software (CRM) to see how frequently they are engaging with their clients. If you’re not speaking with your clients frequently but suddenly you tell them that you’re selling your practice (this happens more often than not), they could have a lot of concerns. No buyer will want to buy a book of concerned clients.

Alternately, say you talk to your clients three or four or more times a year. You let them know that you won’t be staying with the firm forever, that you must retire at some point , too. Then one day you pick up the phone and say, “Hey, I've sold my practice, and these are great people, and I know you will be in good hands.” It goes a long way toward ensuring a smoother transition, and that contributes to the overall value of your practice.

Taking A Holistic Approach to Practice Valuation

If you’re looking to buy a practice, I would advise you to look way beyond revenue. The value of the practice cannot rely entirely on dollars and cents. Unfortunately, a successful acquisition is much more complicated than that, and the accuracy of the buyer’s due diligence is only revealed long after the deal is closed.

If you’re looking to sell your firm, I would advise you to invest time and energy into structuring your practice (or re-structuring your practice) so that you incorporate many of the areas I discussed here - that directly and indirectly impact the value of your business.

James Bode is Managing Partner at Beck Bode , a deliberately different wealth management firm with a unique view on investing, business and life.

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Breaking Into Business Valuation

Steps for small firms to consider when entering the valuation market.

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An aging population, increased regulation and the move toward fair value reporting have led to increased demand for valuation services in recent years. As baby boomers approach retirement and start thinking about succession and estate planning, the first step is often valuing the family business. Changes to the tax code require people doing valuations on certain assets to be a “qualified appraiser,” and the new fair value standards require valuation expertise to implement them.

While it is difficult to establish a valuation practice, it can be a rewarding specialization for your firm. Diversifying your practice will help with client retention, expand your client base, and drive revenue growth. Consider these steps for establishing a valuation practice:

Begin with your current client base. When advising clients on tax planning or estate planning issues, you will see instances where a business valuation is needed. Good first-time valuation projects could be for small family limited partnerships or small businesses.

Plan on spending a lot of time on your first valuations. Preparing checklists, learning how to comply with standards, and setting up models will be time-consuming. Use caution with software valuation packages as some have been found to have significant errors in their models and report-writing modules. It is important to understand the models used to develop your valuations as you should always assume you are preparing a valuation that will be defended in court.

Offer valuation services to local firms that don’t have the ability to do valuations for their clients. Many small firms don’t have the staff or ability to do valuation work for their clients, so this is a good source of revenue once you establish yourself as someone who can do quality valuation work. Your network of peers and your reputation with them will be very important if you decide to pursue this route .

Ensure that engagements are performed in accordance with any applicable guidance. The AICPA issued Statement on Standards for Valuation Services no. 1 (SSVS1) in June 2007, effective for all engagements entered into after Jan. 1, 2008. All AICPA members are required to comply with SSVS1. For CPAs, this standard has been adopted by most state accountancy boards, so check with your state licensing agency to see which standards must be followed.

Get a seasoned valuation expert to review your first reports. The report is often the end product that is seen by clients, and a well-written report can leave a lasting impression on clients and counsel. The report review, if done properly, will take several hours to perform, so plan on engaging a valuation specialist to do this work with the knowledge that you will have to pay for this review. A good place to identify experts is through the ABV locator, which is searchable by name or location, at findanabv.org .

Get a valuation credential. The American Society of Appraisers (ASA) and the National Association of Certified Valuation Analysts (NACVA) offer credentials available to CPAs and non-CPAs. The Accredited in Business Valuation (ABV) credential is available only to CPAs with an active license and is supported by the AICPA (visit aicpa.org/ABV for details). All of these credentials require an exam. The AICPA and ASA credentials also require actual experience performing valuations and minimum education requirements. A credential will be a valuable marketing tool to hold yourself out as meeting minimum requirements for knowledge and competency in performing valuation work. A credential can also identify you as an expert in litigation proceedings.

Market your valuation practice. In marketing your firm for valuation engagements, the end-user often is not the person who will hire the firm. Quite often it is the lawyer or other accounting firm that identifies the valuation specialists and engages them to do the valuation. Consider making presentations to local bar associations and bankers associations to explain what valuation is and why they should hire an expert. Networking with other local accounting firms can lead to valuable referrals for new work.

—By Eddy Parker , CPA, ( [email protected] ) an AICPA technical manager .

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How to value a financial planning practice in 2024

financial planning business financial advice M&A sale

The demand for financial planning businesses for sale isn’t decreasing, and the flood of planners selling post Royal Commission and FASEA isn’t eventuating as quickly as expected – because industry policies continue to change.

Previously a 1 January 2026 date led to a flurry of enquiries from potential vendors, however the current state of events has reduced this. Advisers are sitting waiting, watching to see what happens.

Brokers have long lists of interested acquirers, meaning businesses aren’t necessarily advertised anymore – instead going to a shortlist of acquirers who are known to have execution-ability (the ability to execute a transaction – funding, know how and time/people to manage a transaction).

No substitute for good financial advice

Previously the list of financiers was whittling, with NAB and Macquarie the main banks involved, however with new entrants, such as Judo Bank, smaller transactions are getting off the ground as NAB and Macquarie prefer larger transactions, and tripartite agreements with licensees.

Pre 2023, debt was cheap and the option to take cash off the table, reducing the buy-in price for internal incoming equity holders was attractive. Even buying a financial planning business was cheaper, with debt previously seen at 3-4 per cent per annum.

What does this all mean for the valuation of your financial planning business in 2024, you may ask?

Valuing a financial planning business

There remain two main methodologies to value a financial planning business, that is a multiple of earnings before interest and tax (EBIT) or a multiple of recurring revenue. There is a clear divide on which methodology suits in certain circumstances.

The profitability, future maintainable earnings, or EBIT methodology is relevant where a shareholder is investing in a business. The profit is what pays a dividend to reduce debt on the purchase. Similarly, a sophisticated purchaser is going to review the incremental profit the acquisition generates and consider this in the scheme of their own valuation.

A recurring revenue methodology is used in some ‘bolt-on’ transactions. That is where a client base is acquired, and the servicing of those clients is largely absorbed by the acquirer, with little to no costs being transferred. In these cases, this can be appropriate, however we have also seen this go terribly wrong when an acquirer transferred a few staff members, paying a recurring revenue multiple and essentially extending their payback period of the acquisition to over 12 years (usually acquisitions would be paid back in 6-8 years).

Merging businesses are considering the profit each party brings, any synergy benefits, and how this sits from a percentage contributed by each party.

Let’s look at the methods, and current multiples, in a little more detail.

Method 1 – EBIT Multiple

The EBIT methodology, also known as future maintainable earnings, or profitability based valuation, considers the normal ongoing profit of a business. This is adjusted for any one off or non-commercial income or expense items. We want to consider the profit an arm’s length purchaser would obtain from buying this business.

The most common adjustments we see in smaller financial planning businesses are:

Market salaries – It is common for sole traders, or small businesses, to pay family members for tax purposes, or pay themselves lower or higher wages for certain circumstances. We need to consider a market wage, that is if I employed you to operate this business – what would I pay you?
Run Rate – with most financial planning revenues received on a monthly basis, a new client signing on in May is only going to have 2/12 months of revenue received in a financial year. We need to consider the current run rate of revenue (e.g. if that revenue was received for a 12 month period). This is relevant for new clients, and even those repricing clients ongoing fees.

We see a variance in the profitability of financial planning businesses, with scale a main driver of this. Scale is the point at which we would expect the recurring revenue valuation and future maintainable earnings valuation to intersect, and where the practice can extract a benchmark profit. With the increase in licensing fees and staffing costs, the point of scale has increased over the last few years and is now approximately $1.6-1.8 million in revenue.

This depends on a number of variables, including location, and how the business is operated – e.g. offshoring, I.T, etc. Benchmark profit is approximately 40 per cent with buyers suspicious of profit margins much above a 45 per cent margin, it is not seen as sustainable long term, with key person risk, burn out etc.

There is material investment required to achieve any further profit. The average profit margin for a practice, not yet at scale, is anywhere from 10-30 per cent.

Method 2 – Recurring Revenue

The recurring revenue valuation is still commonly referred to in the industry, and well known sources publish multiples on a regular basis. These days, a purchaser reviews a client list, or buckets of client revenues, and allocates multiples based on age and client fee. A client under $3,000 or over 70 years old is likely to attract a lower multiple than a 55 year old with a $6,000 ongoing fee.

Other factors come into play with these multiples, including location of the client base (a discount will apply for regional clients).

Whilst the market discusses a client base being sold at 3 times recurring revenue, it is unusual to see a blanket multiple applied, and usually an averaging effect brings the multiple down. We have seen transactions where the tail end of a client book has dragged the recurring revenue multiple below a two times recurring revenue. In this circumstance, a conscious effort was made to dispatch with the bottom of the client book and a repackaged client base was put to the market, attracting a normal market multiple (still being customised by client by the purchaser).

Chart 1: EBIT Methodology and Recurring Revenue Intersection

What drives a business valuation higher? In both a recurring revenue and profitability-based valuation, there are conscious actions a business owner can take to improve their business valuation.

These include:

Having strong client reporting, including age and fee per client group (husband and wife being one person), e.g. the client base is segmented and can be reported on in a timely manner.
Having a minimum ongoing fee, and a structure to determine the cost to serve attached to this fee (e.g. is the fee profitable)
Maintaining strong computer systems and up to date software. It is daunting to think of an adviser still having paper files, but there are still firms that are not operating in a digital environment.
Structured clients on like platforms and a client value proposition that is replicable under a new adviser.
A multi-team member approach, where the client is used to dealing with other advisers or client service administrators, reducing the key person risk and potentially allowing a team member to continue on past your retirement, ensuring a smooth transition for your clients (and talent for the acquirer – a positive in an environment with strong demand for quality staff.
Succession plans can contribute to your business valuation as they show strategic planning, e.g. reducing key person risk.

How are firms maximising their opportunity?

It used to be that the highest sale price was one completed in a market transaction, likely at a recurring revenue multiple. These days, we are seeing more and more firms complete internal succession plans where they introduce equity to key employees over time, bringing the team member along for the journey, and selling equity at points along the way – perhaps where certain metrics or KPI’s are met. This can achieve as high a price but provide a greater feeling of satisfaction to the vendor that their legacy lives on.

With any process, be it an internal or external process we find that the firms who start focusing on their business valuation, and future succession planning, tend to have a more positive result, maximising their value and reducing their risk along the way. The market sale approach these days often stretches from 6 months to 12 months with information gathering, due diligence and contracts.

There is no such thing as a good, quick sale.

Fiona Ettles is a partner of FinConnect Advisory Group

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10 Business Valuation Mistakes and How To Avoid Them

By Private Practice Transitions on Jan 25, 2024 2:11:58 PM

Every business owner understands the importance of accurately valuing their business, especially when looking to sell or merge. However, navigating the complicated business valuation process can be challenging, with various potential pitfalls. Below, we'll explore common business valuation mistakes and offer guidance on how to avoid them for business owners.

The Importance of Business Valuation

Business valuation is a crucial aspect of any business, as it determines the worth and potential growth of the company. Accurately valuing a business can provide critical insights for decision-making and strategic planning. Whether you're looking to sell your business, attract investors, or merge with another company, knowing the true value of your enterprise is essential. However, without proper knowledge and guidance, business owners can fall into common valuation pitfalls that can significantly impact the outcome of any transaction.

The Different Types of Business Valuation

There are multiple business valuation approaches, each with advantages and limitations. The most used methods include the asset-based, market, and income approaches. Depending on the nature and characteristics of a particular business, owners may use one or more methods to determine an accurate valuation. Business owners must understand the different valuation methods and choose the one that best suits their business model.

The Difference Between Valuation and Appraisal

Valuation and appraisal are terms that are often used interchangeably, but they have subtle differences. Business valuation is the process of determining the true worth of a company after considering its financial and non-financial aspects, such as assets, liabilities, market trends, growth potential, and more. An appraisal is a formal document or report outlining a business's value, typically conducted by a professional appraiser.

Common Business Valuation Errors

There are many mistakes that business owners can make when valuing their company. By understanding and avoiding these errors, you can increase the accuracy of your valuation and protect your interests.

Not Understanding Tax Implications of Your Entity Status

The legal structure of a business—whether it’s an LLC, corporation, or partnership—can significantly impact taxes upon a transfer. Each entity type has different characteristics and considerations that must be measured when determining deal structure, and the ultimate value you will get for the sale of your business (after taxes). For example, a corporation may have more complex ownership structures and tax implications than an LLC. Not understanding the tax implications of your entity status can result in inaccurate valuations and potential legal or financial consequences.

Underestimating the Cash Flow of Your Business

Cash flow is a critical aspect of any business, and it can significantly impact its value. Many business owners make the mistake of underestimating their cash flow or assuming it will remain consistent. However, unforeseen events such as economic downturns or changes in market demand can disrupt cash flow, making accurate valuation challenging. It's essential to have a realistic understanding of your cash flow when valuing your business to avoid potential discrepancies.

Not Properly Documenting Your Assets and Liabilities

Proper documentation of assets and liabilities is critical for accurate business valuation. Assets can include tangible items, like equipment, inventory, and property, and intangible assets, like patents and trademarks. Liabilities encompass any debts or obligations that the business owes.

Overlooking Non-Cash Assets (Goodwill, Intellectual Property, etc.)

In addition to tangible assets, businesses can possess non-cash assets that contribute to their overall value. Goodwill, which refers to the value of a company's brand and reputation, can significantly impact its worth. In fact, most professional service companies trade almost exclusively on Goodwill value. Similarly, intellectual property such as patents, trademarks, and copyrights can add value to a business.

Not Assessing Market Conditions and Trends

Market conditions and trends can heavily influence the value of a business. For example, if there is high demand for businesses in your industry, your company may have a higher valuation. On the other hand, economic downturns or changes in consumer behavior can cause a decline in business value.

Relying Too Heavily on Market Comparisons

One of the most common valuation methods is the market approach, which involves comparing your business to similar companies recently sold. While this can be useful, relying too heavily on market comparisons can lead to inaccurate valuations. Each business is unique, and factors such as company culture, customer loyalty, and growth potential may not be reflected in market data.

Underestimating the Impact of Leverage

Leverage, or debt financing, refers to using borrowed funds to finance a business. While leverage can be beneficial for growth and expansion, it can also have a significant impact on business valuation. Too much debt can decrease the value of a business by increasing financial risk and decreasing its cash flow.

Not Considering Geographic Factors

Geographic factors can play a significant role in business valuation. For example, the location of a business can influence its market size, competition, and cost of doing business. Businesses in highly desirable areas may have higher valuations due to their potential for growth and profitability. Businesses situated in less favorable locations have lower valuations.

Overlooking Tax Implications

It's essential to consider potential tax consequences and plan accordingly when selling or merging a company. For example, a business with high taxable income may have a higher valuation due to its potential for future profits. If significant tax liabilities are transferred to the new owner, it can decrease the value of the business. It's important to consult a tax professional when valuing your business to ensure all potential tax implications are considered.

Not Hiring a Professional Appraisal

While business owners may attempt to value their company independently, hiring a professional appraiser can provide valuable expertise and insights. A professional appraiser is trained to assess the various factors contributing to business valuation, such as financial statements, market trends, industry-specific considerations, and more. They can also provide an unbiased evaluation of your business, which can be crucial in negotiations. While it may be an additional cost, hiring a professional appraiser can save you money by ensuring an accurate valuation and protecting your interests in any transaction.

Have Your Business Professionally Evaluated With Private Practice Transitions

Accurately valuing your business is crucial for any transaction or strategic planning. Understanding the different business valuation methods and common mistakes can ensure you avoid them and get a more precise evaluation of your company. However, to truly guarantee an accurate and unbiased assessment of your business's worth, hiring a professional valuation service like Private Practice Transitions is essential. With our expertise and experience in business valuation services , we can provide you with a comprehensive evaluation that considers all aspects of your business to help you make informed decisions for the future. Contact us today to learn more about our services and how we can help you with your business valuation needs.

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Introduction to Business Valuation

Understand the advantages and disadvantages of the main valuation techniques
Perform a detailed valuation of a target company
Discuss when each valuation methodology is most appropriate

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Introduction to Business Valuation Course Overview

Valuation is probably the most fundamental concept in finance and is a necessary skill to become a world-class financial analyst. Valuation is the art and science of attributing value to an asset, investment or company. In this course, we will cover the three most common valuation methodologies: comparable company valuation, precedent transaction valuation and discounted cash flow valuation.

Introduction to Business Valuation Learning Objectives

Upon completing this course, you will be able to:

Identify a wide range of valuation methods
Understand the difference between enterprise value and equity value
Explore the three main business valuation techniques
Determine the pros and cons of different valuation methods
Discover how to present your analysis like a world-class financial analyst
Calculate key outputs within the model structure

Recommended Prep Courses

These preparatory courses are optional, but we recommend you complete the stated prep course(s) or possess the equivalent knowledge prior to enrolling in this course:

Math for Corporate Finance
Corporate Finance Fundamentals

Who Should Take This Course?

Introduction to Business Valuation is perfect for investment bankers, equity research analysts, private equity, and financial planning & analysis (FP&A) professionals. This course is structured with a range of video lectures, followed up with exercises and interactive case studies where you have to apply business valuation techniques in Excel. We’ve also included assessments wherever possible so you can test your knowledge. This course is not only good for beginners, but it will also cover some more intermediate discussions for experienced practitioners.

Approx 6h to complete

100% online and self-paced

What you'll learn

Introduction, valuation techniques, presenting valuation results, enterprise value vs. equity value, numerator/denominator consistency, dcf valuation, cost of capital, terminal value, npv and irr in excel, relative valuation, comparable company valuation, precedent transaction analysis, qualified assessment, this course is part of the following programs.

Why stop here? Expand your skills and show your expertise with the professional certifications, specializations, and CPE credits you’re already on your way to earning.

Financial Modeling & Valuation Analyst (FMVA®) Certification

Skills Learned Financial modeling and valuation, sensitivity analysis, strategy
Career Prep Investment banking and equity research, FP&A, corporate development

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Business Valuation Publications

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Forensic and Valuation Interest Area
Accredited in Business Valuation (ABV) Credential

Whether you’re seasoned in business valuation or new to it, AICPA’s business valuation publications are designed to help you develop and hone your skills in this complex practice area. We work closely with the Forensic and Valuation Section to make sure you get the resources and tools you need.

Presents practical guidance and illustrations related to accounting, disclosures and valuation of privately held company equity securities issued as compensation. The objective of this guide is to describe best practices for estimating the fair value of a minority interest in an enterprise's privately issued securities.

Cover (thumbnail) for Divorce - The Accountant as Financial Expert

This in-depth resource provides fresh ideas to any CPA who serves as a financial expert in divorce cases.

Written by Gary Trugman, Understanding Business Valuation simplifies a complex area of practice with real-world experience and examples. This edition has been greatly expanded to include new topics as well as enhanced discussions of existing topics.

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Essentials of Forensic Accounting

The highly experienced authors of the Essentials of Forensic Accounting define and explain the disciplined approaches to forensic accounting that lead to successful fraud detection and deterrence for both professionals and students. Through illustrative examples and explanations, this book makes abstract concepts come to life to help you understand and navigate successfully in this complex area. Essentials of Forensic Accounting is an indispensable resource delivering matchless knowledge to practitioners, financial managers and students in understanding, discovery, mitigation and prevention of fraud. This vital reference resource focuses the elements that must come together to effectively diminish the incidence and impact of fraudulent activities.

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We understand that your needs may extend beyond personal use of a publication. Many AICPA publications can be delivered in electronic form under multiple user licenses. Our Licensing Team is available to assist you with understanding available products and terms.

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If you would like to reprint or reuse material from an AICPA publication, AICPA Rights and Permissions is available to assist you.

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Did you know that AICPA Publications accepts proposals from and publishes the work of thought leaders on Business Valuation topics? For information about our publishing program and how to submit a book proposal e-mail [email protected] .

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Family Business Valuation

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on February 26, 2024

Are You Retirement Ready?

Table of contents, what is family business valuation.

Family business valuation refers to the process of determining the economic value of a business owned and operated by family members.

This value is critical for various reasons such as estate planning , succession planning , tax purposes, or potential sale or merger of the business.

The valuation process requires a thorough analysis of the business's financial statements , assets , liabilities , and various other factors to arrive at an accurate and fair valuation.

There are several methods to value a family business, each with its own set of considerations and limitations.

The choice of the method depends on the specific circumstances of the business and the objectives of the valuation. Regardless of the method chosen, the goal is to provide an objective and comprehensive understanding of the business's worth.

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Taylor Kovar, CFP®

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(936) 899 - 5629

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I'm Taylor Kovar, a Certified Financial Planner (CFP), specializing in helping business owners with strategic financial planning.

When a third-generation family bakery faced a succession crisis, we stepped in with a tailored valuation strategy that combined traditional financial metrics with an appreciation for the bakery's unique community value. By leveraging both tangible assets and intangible factors like brand loyalty, we were able to present a fair valuation that satisfied all family members. Let us help you navigate your family business challenges with insightful valuation strategies that honor both your financial goals and your heritage.

Contact me at (936) 899 - 5629 or [email protected] to discuss how we can achieve your financial objectives.

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Importance of Family Business Valuation

Family business valuation plays a critical role in a multitude of operational and strategic decisions.

When considering transactions like buying or selling shares to employees, or retiring and selling to other family members, it offers a fair market value that ensures equitable transactions.

It's invaluable in succession planning, such as gifting shares to heirs, and in mitigating potential estate tax issues. A proper valuation is also instrumental in securing appropriate key man insurance coverage.

Another reason to value a family business is to facilitate negotiations for the potential sale or merger of the company. A well-established valuation helps both the buyer and seller in understanding the worth of the business, making it easier to agree on a fair price.

For non-family key management, a solid valuation provides a basis for phantom stock plans, ensuring that their contribution is duly recognized and rewarded.

Additionally, the valuation process helps business owners identify areas for improvement and growth, which can ultimately increase the value of the business.

Hence, a comprehensive valuation is a significant tool in maintaining the health, growth, and sustainability of a family business.

Types of Family Business Valuation Methods

Market approach.

The market approach to valuation involves comparing the family business to similar businesses that have been sold or are listed for sale in the market.

This method relies on the assumption that businesses in the same industry and market share similar characteristics and can be used as benchmarks for determining the value of the subject company.

Two commonly used techniques under the market approach are the guideline public company method and the guideline transaction method.

The guideline public company method compares the family business to publicly traded companies in the same industry. This method takes into account various valuation multiples such as price-to-earnings , price-to-sales , or price-to-book value ratios .

The guideline transaction method, on the other hand, focuses on analyzing transactions of similar businesses that have been sold or acquired, considering factors such as transaction size, industry, and timing.

Income Approach

The income approach to valuation is based on the present value of the expected future cash flows generated by the family business.

This method estimates the value of the business by calculating the present value of the cash flow that the business is expected to generate in the future, discounted at an appropriate discount rate .

The two main techniques used under the income approach are the discounted cash flow (DCF) method and the capitalization of earnings method.

The DCF method involves projecting the company's cash flows over a specific period, discounting them back to their present value, and then adding the present value of the terminal value at the end of the projection period.

The capitalization of earnings method, on the other hand, involves estimating the company's future earnings, which are then divided by a capitalization rate that reflects the risk associated with the investment.

Asset-Based Approach

The asset-based approach to valuation focuses on the net asset value of the family business, which is calculated by subtracting the company's total liabilities from its total assets.

This method is particularly relevant for businesses with significant tangible assets , such as real estate, machinery, or inventory.

The asset-based approach can be used under two main techniques: the adjusted net asset method and the liquidation value method.

The adjusted net asset method involves adjusting the company's assets and liabilities to their fair market value, which may differ from the book value recorded in the financial statements.

This method provides a more accurate representation of the company's net asset value, taking into account factors such as depreciation , obsolescence, and appreciation of assets.

The liquidation value method estimates the net proceeds that would be received if the family business were to be sold off and its assets liquidated.

This method is often used when the business is in financial distress or when its ongoing operations are not generating sufficient returns.

The liquidation value method considers factors such as the costs associated with selling assets, settling liabilities, and any potential discounts or premiums applied during the liquidation process.

Factors to Consider in Family Business Valuation

Revenue and profitability.

Revenue and profitability are important indicators of a company's financial health and growth potential.

Higher revenue and profitability typically translate to higher business value. To assess these factors, a valuation analyst will analyze historical financial statements, evaluate profit margins , and consider the growth potential of the business in its industry and market.

Cash flow is an essential factor in business valuation, as it represents the amount of cash generated by the company's operations. A business with strong and stable cash flow is generally considered more valuable than a business with erratic or negative cash flow.

When valuing a family business, it is crucial to assess the company's historical cash flows, as well as to project future cash flows based on factors such as growth rates, working capital requirements , and capital expenditures .

Assets and Liabilities

The company's assets and liabilities play a significant role in determining its value, particularly in the asset-based valuation approach.

Assets such as real estate, machinery, and inventory can contribute to the business's overall value, while liabilities, such as loans and other obligations, reduce the value.

An accurate valuation must take into account the fair market value of assets and liabilities, which may differ from their book value.

Management Team

The strength and experience of the management team can have a significant impact on a family business's value.

A strong management team, with a proven track record and industry expertise, can increase the likelihood of the business's success and growth, which in turn, can increase its value.

When valuing a family business, the analyst should consider factors such as the management team's experience, expertise, and succession planning.

Market Competition

The competitive landscape in the market and industry in which the family business operates can affect its value.

A company facing strong competition may have a lower value compared to a company that enjoys a dominant market position or operates in a niche market with limited competition.

It is essential to evaluate the company's competitive position, market share, and barriers to entry when valuing a family business.

Industry Trends

Understanding industry trends and dynamics is crucial for assessing the future growth potential of a family business. Factors such as technological advancements, changes in consumer behavior, and regulatory changes can significantly impact a company's value .

A thorough valuation should consider both the current state of the industry and its expected future trends.

Best Practices for Family Business Valuation

Restating operating income.

Restating the operating income involves adjusting the income statement for any transactions that do not reflect the company's economic reality.

Such transactions may include owner's compensations that are above or below market rates, personal expenses billed to the company, or one-time expenses that are not expected to recur.

This step is important to ensure the valuation is based on the economic earnings of the business, rather than the reported accounting income, which can be influenced by personal family decisions or accounting practices.

It provides a clearer picture for potential buyers or investors, and can also be useful for family business owners themselves for strategic planning and decision-making.

Seek Professional Help

Valuing a family business can be a complex and time-consuming process. It is recommended to seek the help of a professional valuation expert who has the necessary knowledge, experience, and resources to provide an accurate and reliable valuation.

A professional valuator can ensure that the valuation is conducted using the most appropriate methods and takes into account all relevant factors.

Use Multiple Valuation Methods

Relying on a single valuation method may not provide the most accurate representation of a family business's value. It is a good practice to use multiple valuation methods, such as the market, income, and asset-based approaches, to cross-check and validate the results.

This approach can help to account for any limitations or biases inherent in each method, leading to a more comprehensive and reliable valuation.

Consider the Long-Term Outlook

When valuing a family business, it is important to consider the long-term outlook of the company and its industry.

Short-term fluctuations in financial performance or market conditions can be misleading and may not accurately reflect the true value of the business.

Taking a long-term perspective can help to account for these fluctuations and provide a more accurate assessment of the company's potential for growth and profitability.

Communicate With Family Members

Effective communication among family members is crucial during the valuation process. Family members should be transparent about their expectations and objectives, as well as any concerns or issues that may arise during the process.

Open communication can help to minimize misunderstandings and conflicts and ensure that all family members are on the same page regarding the valuation and its implications for the business.

Common Challenges in Family Business Valuation

Lack of transparency and information.

Family businesses often face a lack of transparency and information, which can make the valuation process more challenging. Financial records may be incomplete or outdated, making it difficult to assess the company's true financial performance and position.

In such cases, it is essential to work with a professional valuator who can help to obtain the necessary information and provide an accurate valuation.

Emotional Attachment to the Business

Family members often have a strong emotional attachment to their business, which can make it difficult to objectively assess its value.

Emotional attachment can lead to unrealistic expectations about the company's worth, resulting in conflicts and disagreements during the valuation process.

It is important for family members to recognize and address these emotional attachments and work together to achieve a fair and objective valuation.

Family Dynamics and Conflicts

Family dynamics and conflicts can significantly impact the valuation process. Conflicting interests, personal biases , and differing expectations among family members can make it challenging to reach a consensus on the business's value.

To minimize the impact of these conflicts, family members should communicate openly and honestly, seek professional help, and strive to maintain a focus on the best interests of the business.

The Bottom Line

Family business valuation is a complex and essential process that helps business owners understand the worth of their company and make informed decisions about its future.

There are several methods for valuing a family business, including market, income, and asset-based approaches.

Factors such as revenue, profitability, cash flow, assets, liabilities, management team, market competition, and industry trends should be considered during the valuation process.

Common challenges in family business valuation, such as a lack of transparency and information, emotional attachment to the business, and family dynamics and conflicts, should be acknowledged and addressed to ensure a fair and accurate valuation.

By understanding the importance of family business valuation, selecting the most appropriate valuation methods , and addressing the various factors and challenges involved, family business owners can obtain a comprehensive and reliable understanding of their business's worth.

Family Business Valuation FAQs

What is family business valuation.

Family business valuation is the process of determining the worth of a family-owned business.

Why is family business valuation important?

Family business valuation is crucial for decision-making, including estate planning, mergers and acquisitions, and selling or transferring ownership.

What are the types of family business valuation methods?

The three common approaches to family business valuation are market approach, income approach, and asset-based approach.

What factors are considered in family business valuation?

Financial factors like revenue, cash flow, assets, and liabilities are considered, along with non-financial factors such as management team, competition, and industry trends.

What are the best practices for family business valuation?

Seeking professional help, using multiple valuation methods, considering the long-term outlook, and communicating with family members are essential best practices for family business valuation.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How a Business Valuation Can Enhance the Value of Your Company

A valuation provides a roadmap for improvement.

There are many reasons a business owner may want to obtain a business valuation, and the first among them is that the owner will want to exit the business at some point. An independent valuation performed by a business valuation professional will be necessary to support the asking price if the company is to be sold to an outside buyer.

But business valuations are also necessary for other types of exit plans, including selling or gifting the business to a family member or selling to employees. Additionally, a business valuation can be an important component of an estate plan.

A best practice is to obtain a valuation as early as five to seven years before a planned business exit, giving the owner time to make improvements to the business, enhancing the value of the company when another valuation is calculated when the owner is ready to go to market.

The Levers of a Business Valuation

The key levers of a business valuation are:

Cash Flow

A higher cash flow means a higher value for the business. A business valuation professional will typically look at the most recent five years of your company’s history to ascertain trends in cash flow. A stable trendline will impact the value favorably, and that’s what potential buyers want to see.

Certain events can impact your cash flow, such as bringing a new product or service online. When your business is expanding its offerings, some strategies to protect your cash flow include setting a realistic budget and sticking to it and putting together sales and revenue forecasts. A valuation professional will look at those forecasts to see if you hit your marks.

Higher growth also means a higher value for the business. A valuation professional will look at your company’s organic growth and, in particular, your pricing strategy, especially now that we are in an inflation cycle. If a company is paying its employees higher salaries and paying more for raw materials and components, its pricing strategy must keep up in order to protect cash flow.

Does the company have a recurring revenue stream, with many returning customers influencing a stable growth pattern? This is a positive factor that potential buyers would like to see. However, it’s a double-edged sword because an over-concentration of sales to the same customer base can also be viewed as a risk factor if those customers could suddenly disappear.

Companies that build routine maintenance contracts on top of their core business – such as heating, ventilation and air conditioning contractors – are also attractive to buyers because they have diversified their revenue streams. The same applies to technology companies that sell their products and services on a subscription basis.

Lower risk is the third factor that drives a higher value. Significant levels of risk in a company translate into a discount rate on the valuation.

Many factors influence the level of risk a company is perceived to have. An over-reliance on a concentrated set of customers in a single industry is a risk factor, as is a company’s over-reliance on a single key manager.

Other risk factors can include sourcing issues. If your raw materials and components come from China, do you have backup sources in the U.S. or other parts of the world? We have all seen recently what a supply chain disruption can do to companies and whole industries.

Diversification of customer groups and supply sources, as well as product and service lines, help spread and dilute a company’s risk factor in a business valuation.

Leverage is another risk factor, one that is growing in the current inflationary cycle. Highly leveraged companies – particularly in a high interest rate environment – can see their cash flow negatively affected, especially if they have variable rate loans.

How Business Valuation Enhances the Value of a Company

A business valuation reveals vulnerabilities that every company has. A good valuation provides a roadmap for improvement, serving as a starting benchmark against which you can measure the company’s value again three to five years down the line after making improvements.

Many of those improvements may be made in the area of financial management and operations. But some may be made in key non-financial, non-operational areas that also influence valuation.

Some of the non-financial factors that impact a valuation include:

A written internal succession plan identifying key employees is an important document that can enhance the valuation of a company and give potential buyers peace of mind about the transition to ownership.

A written, up-to-date buy/sell agreement is like a will for your company that spells out what would happen if you or a principal were to die or become incapacitated.

Life insurance policies on key persons in the company – specifically owners and possibly key C-level executives – also enhance value by showing potential buyers that the owners have kept the company’s best interests in mind by ensuring its smooth transition should an unforeseen death occur.

Processes

Technology, intellectual capital, work processes and manufacturing processes are all examined during a business valuation. Keeping the company’s key processes up to date and aligned with your competitors and your industry can help build and maintain value.

Facilities

What is the state of your physical facility? Is it well maintained and as attractive as possible? Are the furnishings and equipment in good working order and free of blemishes? Is the physical location advantageous for customers who must visit you?

If the answer to any of these questions is “no,” take the time and make the investment to improve the facilities before you get a final valuation in preparation for taking your business to market.

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A business valuation can serve many purposes, and for owners who are putting in place exit or succession plans, a benchmark valuation can help frame the exit preparation for the next five to seven years. If you would like to discuss obtaining a business valuation for your company, contact an Adams Brown advisor .

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Business Valuation is a comprehensive process used to determine the economic value of a whole business or company unit, based on factors like its asset value, market position, and future earnings potential.

A business valuation involves assessing various elements of the business to estimate its selling price or value for different purposes, such as investment analysis, business sales, or mergers and acquisitions. For entrepreneurs and business owners, understanding business valuation is key to making informed decisions about their company’s future and financial health.

Valuation Methods

Asset-based approach (also known as book valuation).

The Asset-Based Approach, often referred to as “Book Valuation,” focuses on the value of a company’s assets. It involves totaling the value of all the company’s tangible and intangible assets and then subtracting its liabilities. This approach is most applicable to companies with significant physical assets.

Income Approach (Also Known as Discounted Cash Flow (DCF) Analysis)

The Income Approach, frequently termed as “Discounted Cash Flow (DCF) Analysis,” estimates a company’s value based on its expected future cash flows. These cash flows are then discounted back to their present value, using a discount rate that reflects the risk of the cash flows. This method is particularly useful for companies with stable and predictable cash flows.

Market Approach

The Market Approach values a company by comparing it to similar companies that have been sold or are publicly traded. This approach is especially relevant for businesses operating in industries with a large number of comparable companies and transactions.

Hybrid Approach

A Hybrid Approach combines elements of the asset-based, income, and market approaches to provide a more comprehensive valuation. This method is particularly useful when each individual approach has limitations due to the unique characteristics of the business being valued. For instance, a business might have significant physical assets (favoring an asset-based approach), stable cash flows (suitable for the income approach), and comparable companies in the market (aligning with the market approach). By integrating these methods, the hybrid approach offers a balanced and nuanced valuation, considering multiple facets of the business’s value.

Application in Business Valuation

In practice, the choice of valuation method depends on the nature of the business, the purpose of the valuation, and the availability of data. For instance, startups with limited financial history might not find the income approach as effective, whereas established companies with significant physical assets might lean towards the asset-based approach. The hybrid approach can be particularly useful in complex valuation scenarios where a single method may not capture the full picture of a company’s value.

Using a combination of these methods can provide a more rounded and accurate estimation of a company’s worth, essential for strategic decision-making, investment analysis, and transactions such as mergers and acquisitions.

Valuation Professionals:

Certified Valuation Analysts (CVAs), Accredited Senior Appraisers (ASAs), and other valuation professionals play a crucial role in the business valuation process. They provide expertise, objectivity, and standardized methods to ensure a fair and accurate valuation, especially in complex scenarios or legal proceedings.

Frequently Asked Questions

When should a business consider getting a valuation?

A business should consider getting a valuation in several scenarios, such as when contemplating a sale or merger, seeking investment, planning for taxes, or during legal proceedings involving asset division. It’s also useful for strategic planning and understanding the financial growth or trajectory of the company.

How can the choice of valuation method impact the estimated value of a business?

The choice of valuation method can significantly impact the estimated value of a business as each method focuses on different aspects of value. For instance, the asset-based approach might yield a different value compared to the income or market approach, as it focuses on tangible assets rather than earnings potential or market comparables. The appropriate method depends on the nature of the business and the purpose of the valuation.

Why is it important to engage professional valuation services?

Engaging professional valuation services is important to ensure accuracy, objectivity, and compliance with legal and financial standards. Professional valuators have the expertise to apply the most suitable valuation methods and consider all relevant factors, resulting in a more reliable and credible valuation. This is especially crucial in high-stakes situations like legal disputes, significant business transactions, or complex financial planning.

What is a valuation multiple and how is it used in business valuation?

A valuation multiple is a financial metric used to estimate a business’s market value relative to a key financial statistic, such as earnings, sales, or assets. Common examples include price-to-earnings (P/E) ratio, enterprise value-to-sales (EV/Sales), and enterprise value-to-EBITDA (EV/EBITDA). These multiples are derived from market comparisons and are used to value a business by applying the multiple to the corresponding financial metric of the business being valued. They are particularly useful in the market approach to business valuation.

Can a brand-new company be valued, and what factors contribute to its valuation?

In most cases, a brand-new company without operational history or financials may not have a significant established value. However, its potential value can be determined based on factors such as the entrepreneur’s experience, the uniqueness of the business idea, market potential, intellectual property, and anticipated future cash flows. While it’s challenging to assign a concrete value to a new company, these factors can provide investors or founders with an initial estimation of its potential worth.

How is the valuation of a brand-new company typically determined?

The valuation of a brand-new company is often determined by projecting its future cash flows and then discounting them to their present value using an appropriate discount rate (as in the Discounted Cash Flow Analysis). This method is predicated on the expectation that the company will generate positive cash flows in the future. Other factors, like market demand for the product or service, the strength of the business plan , and the experience of the management team, also play a crucial role in this valuation process. For very early-stage companies, valuation may also be influenced by comparable transactions in the industry or by the amount of capital the founders need and the amount of equity they are willing to give up.

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6 Events That Require a Valuation of Your Financial Practice

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Most experienced business owners understand valuations as an essential tool to assist in making critical decisions for their advisory practice. Unfortunately, many advisors will invest time and effort in getting their practice appraised, only to find out that the underlying analysis is irrelevant to the specific purpose of the valuation.

Furthermore, using the wrong valuation can get even more complicated with the IRS (and other government agencies) in the picture, and can create more risk in a divorce. It’s crucial to obtain the proper valuation for your business need and ensure that it’s prepared by an accredited valuation professional who’s knowledgeable about the unique characteristics of a financial service practice.

Before we cover the various scenarios that require a valuation, it’s important to emphasize that the key to an effective valuation is to determine why you need your practice valued, what needs to be valued, and who the intended reader is. With this information, your appraiser can determine the appropriate standard of value for your analysis. A standard of value defines whose perspective of value needs to be considered and what adjustments should or should not be included in your analysis. The purpose and the standard of value aid the appraiser in determining the most appropriate valuation methods that should be applied (market, income, or asset).

There are several situations that require a financial services practice to be appraised. Below are the six most common scenarios that cause an advisor to seek a professional business appraisal.

1. Acquisitions

To sell or acquire a practice, a valuation isn’t required. However, given that the seller’s business is most likely their most valuable asset and the size of the investment required from the buyer, it is best practice to obtain a professional, unbiased, third-party assessment of value.

For most acquisitions, a market approach using comparable transaction data will suffice. The analysis should focus on the assets being purchased, primarily the client relationships, the assets being managed or advised, and the revenues received for the services provided.

For smaller practices, typically solo practitioners generating less than $1m in gross revenue, less emphasis will be placed on their direct operating costs. This is best accomplished using a gross revenue multiple (GRM).

For practices over $1m in gross revenue but less than $5m, the valuation focus needs to shift to the earnings (SDE, EBITDA, etc.) the practice generates. Failing to account for the earnings or lack thereof, for practices this size or larger can result in a material understatement or overstatement of value.

For practices over $5m, the combination of a market approach and income approach should be used to get the most accurate measure of value.

For buyers, specifically those looking to get a loan, the bank will require a valuation of the whole practice regardless of whether the borrower is acquiring the entire practice or a minority interest. The bank needs to know the value of the collateral securing the loan, which is the entire business, not the portion being acquired.

For a conventional loan, each bank will have its own requirements for underwriting. Be sure to check with your bank about these requirements. For a loan backed by the Small Business Administration (“SBA”), the SBA has specific requirements that the underwriter/bank must follow. Below is a list of the requirements by the SBA as they pertain to valuing a practice for a change of ownership:

Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;
Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;
Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts;
Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers.
The business valuation must be requested by and prepared for the lender. The lender may not use a business valuation prepared for the applicant or the seller. The cost of the appraisal may be passed on to the applicant.
The valuation should clearly state whether the transaction is an asset purchase or a stock purchase.
The business valuation must include the individual’s conclusion of value, the qualifications of the individual performing the appraisal, and their signature certifying the information contained in the appraisal.

Since the lending process can add quite a bit of time to the process of purchasing a practice or a partial interest in a practice, having a business valuation that doesn’t meet the SBA’s requirements, can add additional time and cost to the process.

3. Internal Succession Planning

The focus on valuations for an internal succession plan should include both an analysis of the value of the assets in the market as well as the value of the company based on the cash flows available to a minority owner.

Before selling an interest in your business, it’s essential to “clean up” the books and remove any discretionary expenses that are consuming business cash flows when they shouldn’t be. Examples of this would include automobiles and airplane-related expenses, hangers, country club memberships, etc. Valuing a minority interest is different than valuing a controlling interest since the value needs to reflect the cash flows available to the minority owner. These discretionary expenses reduce cash flows, thus reducing the value of the shares.

4. Mergers & Teaming

For mergers and teaming, advisors serving a joint client base and sharing revenue, an equity valuation is needed to account for the value of the practice, any additional assets being contributed, and any debt being reassigned.

The goal of a teaming arrangement is to break down the barriers between practices, moving from a siloed, eat-what-you-kill model to an equity-centric model where the team is working for the business, not the individual producers.

To determine the ownership in the new equity-centric business, an equity valuation of each practice should be performed to determine the value of their individual contributions. The type of analysis will depend on the deal and the size of the practices. For most teaming engagements, a market-based valuation will suffice.

The analysis necessary to accurately value the marital assets of a practice for a divorce will vary from state to state. Some states exclude the value of the assets if they were acquired or inherited before the marriage. Some states exclude personal or professional goodwill as a marital asset, which can make up a significant portion of the practice’s value.

The appraiser needs to collect a significant amount of information about the business, decide which approaches are most appropriate, and if necessary, measure and identify the portion of value attributed to personal goodwill and remove it from the valuation.

Valuing intangible assets is complex work. For a divorce or any matter being litigated or disputed, you need an accredited appraiser who knows how to value intangible assets and can clearly and effectively testify and explain their methodology and conclusions.

6. Charitable Contributions

When it comes to charitable contributions, the IRS has guidelines for what needs to be valued, when the valuation needs to be completed, and what needs to be included in the report.

The key differentiator for an IRS-related valuation, specifically for a charitable contribution, is that the appraiser is subject to severe penalties if the IRS disagrees with the appraiser’s conclusion.

Since the intended reader, the IRS, is not familiar with the practice, the industry in which the practice operates, and the marketplace for the assets of the practice, the appraiser needs to provide a sufficient level of detail in their report for the reader to gain a level of familiarity to determine if the valuation result meets their criteria.

The report needs to discuss the historical, current, and future expected performance of the economy, industry, practice, and market for the practice, as well as the economic factors that impact the industry, business, and market. In short, the report must contain a significant amount of both quantitative and qualitative detail to allow someone who is not familiar with the business to understand how the appraiser determined the Fair Market Value of the property.

It’s important to emphasize that in the event of an IRS audit, which may not happen for a couple of years after the completion of the valuation, all aspects of the appraiser’s analysis, work files, and all sources of information relied upon, must be documented and accessible. If the report complies with the standards, then there's a three-year statute of limitations for the IRS to challenge it. Of course, if it turns out that the valuation wasn’t compliant, it can be reopened. Thus, a compliant valuation is crucial when it comes to charitable contributions.

The critical point we want to make you aware of is the importance of seeking a valuation based on the purpose or need, not convenience or, frankly, a low price. There is no “one-size-fits-all” purpose when it comes to valuing a practice. Be sure that you understand why you want or need a valuation, what needs to be valued, and who the intended reader is. Finally, choose an expert with the appropriate accreditations that is familiar with the financial services industry. Doing this may cost more upfront, but it will save you time and money in the long run.

Related: Succession Planning: The Secret Sauce to a Smooth Exit Strategy

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Financial Advisor

Financial Planning Basics

Updated: Jun 26, 2024, 4:51pm

No matter the size or scope of your financial goals, a financial plan can help make them a reality.

Financial planning is the process of looking at the current state of your finances and making a step-by-step plan to get it where you want it to be. That may mean devising a plan to become debt-free or figuring out how to save enough money for a down payment on a new home.

This process can include many aspects of personal finance, including investing, debt repayment, building savings, planning for retirement and even purchasing insurance.

Anyone can engage in financial planning—it’s not just for the wealthy. You can get started on making financial goals on your own, and if you choose, you can work with a financial professional to help devise the smartest plan to make those goals a reality.

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5 Steps to Create a Financial Plan

A financial plan is devised of smaller goals or tasks that will help support you along your financial journey. Create a financial plan with these five steps:

1. Identify Your Financial Goals

By identifying your financial goals, you’ll have a clear idea of what you need to accomplish to make them happen. Your goals should be realistic and actionable and include a timeline of when you want to accomplish them.

Making a goal to pay off credit card debt by a certain date, for example, would be an appropriate financial goal that will set you up for success.

2. Set a Budget

Having a clear picture of your finances will make it easier to achieve any financial goals. A budget can help you understand where your money is going each month. It can also help you identify where you may be overspending, giving you opportunities to cut back and allocate that money elsewhere.

One of the easiest budgets to start with is the 50/30/20 budget . This budget plan allocates your monthly income into three buckets: mandatory expenses (50%), savings and debt repayment (20%) and discretionary spending (30%). This is just one of many types of budgeting plans out there.

A budget should be a guide to help you understand your monthly finances and devise smaller goals that will bring you closer to your long-term financial goals. You likely won’t always follow your budget down to every single penny; keeping this in mind will help you stay on track, rather than get discouraged and give up on budgeting altogether.

There are apps out there that make budgeting much easier by helping you visualize your spending and savings choices each month. Some budgeting apps even give you the option to enter your financial goals directly into their platform to help you stay on track. A fully featured budgeting app allows you to track spending, manage recurring bill payments, set savings goals and manage your monthly cash flow.

3. Build an Emergency Fund

Building an emergency fund will help make sure that a financial emergency doesn’t become a catastrophic financial event.

Experts usually recommend having six months’ worth of living expenses saved to cushion you, should the unfortunate unexpected happen, such as losing a job. But six months’ worth of money can be unattainable for those who may be struggling financially, or those living in tight financial means each month.

You can start building an emergency fund by setting a few dollars aside each paycheck. You can start with a small fund goal of $100 to $200 to establish your fund. From there, you can create other smaller goals that will add up to a larger financial cushion. Some budgeting and savings apps also give you the option of rounding up to the nearest dollar in transactions and funnel that spare change toward your savings.

4. Reduce Your Debt

Having to make debt payments each month means you’ll have less money to allocate toward your purchase goals. Plus, carrying credit card debt can be expensive; every month, you’re accruing interest on your balance, which can make it take longer to pay off.

There are a variety of debt payoff methods out there. Two of the most popular include the debt snowball and debt avalanche methods . With the snowball method, you’ll pay off your smallest balance debts first, then make your way to the ones with the higher balances. The debt avalanche, on the other hand, starts with higher interest rate debts first.

5. Invest for the Future

Although risky, investing can help grow your money, even if you’re not wealthy. You can get started with investing by enrolling in your company’s 401(k) plan or opening a low-or-no fee account through an online broker .

Keep in mind that investing always involves some risk; you could end up losing the money you invest. There are also robo-advisors that automatically recommend investments based on your goals and risk tolerance.

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Bottom Line

A financial plan is composed of a series of smaller goals that will help you achieve a larger financial goal, such as purchasing a home or retiring comfortably. A solid financial plan includes identifying your goals, creating a budget, building an emergency fund, paying off high interest debt and investing.

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Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top performer in the mortgage industry and his entrepreneurial success to simplify complex financial topics. Jordan aims to make mortgages and loans understandable.

Are financial advisors just glorified salespeople?

Financial advisors can be a great resource for busy consumers, but recent allegations against employees of major banks have raised questions about the integrity of financial advice. Personal finance contributor Christopher Liew addresses some of these concerns and highlights the distinction between unethical practices and the genuine value that good advisors can offer (David Gyung / Getty Images)

Every major bank and credit union in Canada employs financial advisors who help customers manage their money, investments, and assets.

Advisors can be an excellent resource for busy consumers and those who would rather avoid the complexities of financial management. However, recent allegations against employees of major Canadian banks raise questions about the integrity of financial advice.

Some suggest that high-pressure sales tactics are not uncommon, leading consumers to wonder if financial advisors are merely glorified salespeople. I’ve worked as a financial advisor in Canada, and I’ll address some of these concerns and highlight the distinction between unethical practices and the genuine value that good advisors can offer.

High-pressure sales tactics used in banks

First, let’s discuss how financial advisors are paid.

While some advisors are salaried or paid hourly, many also charge asset management fees or earn commissions by selling certain financial products and services. They can also have aggressive sales targets to hit in order to reach a certain bonus or to not get fired.

Since many advisors earn commissions and charge fees based on the number of assets they manage, it could create an incentive to upsell and often oversell certain products and services. This is where your advisor’s integrity comes into play.

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Here, a greedy advisor may attempt to use high-pressure sales tactics to push products to you that you may not necessarily need, similar to some of the dishonest tactics used by less-than-reputable car dealerships.

Some of these include:

Upselling unnecessary products: Encouraging customers to purchase additional financial products they may not need.
Misleading information: Providing incomplete or misleading information to make a sale.
Unauthorized account changes: Opening new accounts or altering existing ones without explicit customer consent.
Fear tactics: Using fear-based language to push customers into making quick financial decisions.
Persistent follow-ups: Excessive follow-up calls and emails pressuring customers to take immediate action.

Recent reports have highlighted the prevalence of high-pressure sales tactics among employees of Canada's major banks. Independent investigations reveal that employees often face significant pressure from their superiors to meet sales targets, which can unfortunately lead to unethical practices.

The dual nature of financial advisors

I’ve worked at a big bank as a financial advisor in the past, and most financial advisors I met are honest people. Not all financial advisors are untrustworthy. While there are some bad actors, the unfortunate reality is that unethical management practices and unrealistic expectations imposed by management on their staff can put honest financial advisors in difficult situations.

Many consumers are starting to work with financial advisors who charge a fee-for-service. Instead of getting a commission for selling a specific type of product, the advisor charges a fee for financial planning or other services provided.

Visit our opinion page for more editorials from this columnist and others

This isn’t to say that all bank-employed advisors are bad. But if you’ve had a bad experience, it may be wise to seek out a fee-only arrangement instead.

This is one way to ensure that the financial advisor will have less of a conflict of interest when recommending a certain investment product or service.

Qualities of a good financial advisor

The Investment Funds Institute of Canada (IFIC) has a long list of great success stories showing the positive impact of financial advisors . Some green lights to look for when vetting a financial advisor or wealth management firm include:

Client-first approach: Prioritization of the client's best interests and financial goals.
Transparency: Clear information about fees, services, and potential conflicts of interest.
Qualifications and experience: They possess relevant certifications and a proven track record of success.
Personalized advice: They tailor their advice to fit the individual needs and circumstances of each client.
Ongoing support: Offer continuous support and adjustments to financial plans as life circumstances change.

Red flags to look out for

In contrast, here are some red flags to keep an eye out for:

High focus on upselling products: Focus on selling products for commissions rather than providing unbiased advice.
A lack of transparency: Hide or downplay fees, commissions, and conflicts of interest.
A one-size-fits-all approach: Provide generic advice that doesn’t consider the unique financial situation of each client.
High-pressure tactics: Use aggressive sales tactics to push products that may not be in the client's best interest.
Neglect: Fail to provide ongoing support and regular updates to the financial plan.

The positive impact of a good advisor

Becoming a financial advisor in Canada is not easy. To become an advisor, you must complete training to become licensed and certified .

That being said, a good advisor can really help those with financial needs. They understand the complexities of the finance space and help you make the best decisions with your money, allowing you to take a more hands-off approach to managing your wealth.

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Working with a good financial advisor can give you considerable peace of mind, mitigate some of the risks associated with investing in money markets, and allow you to make more confident decisions with your money.

Should I work with a financial advisor?

Whether you’re choosing a new doctor, mechanic, accountant, or financial advisor, there will be people who are great at their profession, as well as bad apples who are looking for a quick buck. It’s up to you to sift through the ones that are out there and choose the one best suited for your needs.

Working with a financial advisor isn’t always a necessity. For those who are more financially savvy, DIY investing in ETFs through a TFSA or RRSP can be a great way to invest for your future.

However, if you’re working with larger sums of money or plan to diversify your assets, purchase property, start a business, make major investments, or merely want a professional to help guide your financial future, a trustworthy financial advisor can help you plan and invest with clarity and confidence.

Not sure where to put your money? Keep on reading to learn about more wealth management tips for high-income earners .

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on Blueprint Financial .

Do you have a question, tip or story idea about personal finance? Please email us at [email protected] .

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Anaplan CEO: How decision excellence drives enterprise performance

Since it was founded in the United Kingdom close to two decades ago, enterprise software company Anaplan has been built around the core concept of what it has dubbed “connected planning.” For customers who had long dealt with a messy patchwork of different systems and manual processes, this has meant having a single platform to enable integrated planning and forecasting for everything from finance and sales to supply chain and operations.

Over the years, as the pace of business and the amount of information have grown exponentially, connected planning has evolved to include extensive, dynamic scenario planning, enabling what CEO Charlie Gottdiener calls the “connected enterprise”—an organization in which employees spend most of the time “making decisions and iterating scenarios to make the best decisions.”

In a recent interview with McKinsey, Gottdiener, a veteran technology and private equity executive who took Anaplan’s helm in 2022, discusses how, and by how much, faster decision making and enterprise connectedness fuel business performance; what the Miami-based company is doing to make both itself and its customers more connected (and disciplined) enterprises; and the ways in which generative AI (gen AI) could increase the value and insights Anaplan’s platform can offer in the near future. An edited transcript of the conversation follows.

Quantifying the value of good decision making

McKinsey: Anaplan recently published research on the value of decision excellence. Based on your experience and research, how clear is the connection between better decision making and company performance?

Charlie Gottdiener: In our research, we found a very strong connection between making great decisions, or what we call decision excellence, and performance. 1 Enterprise Decision Excellence Report 2024 , Anaplan. We define decision excellence as the velocity, quality, and efficiency of decision making. We surveyed 500 executives across the top 1,000 companies in the UK, US, and Canada, and those that were in the top quartile of decision excellence outperformed those in the bottom quartile by 14 percentage points of total shareholder returns. That is equal to $10 billion of market capitalization across that group of companies. So decision excellence is worth $10 billion; that’s how we think of it.

McKinsey: The pace of business these days means that leaders and executives need to make good decisions faster and more frequently. What do you hear from customers about the pressure and challenges of decision making?

Charlie Gottdiener: Customers tell us that they are overwhelmed by the amount of information that they’re taking in. This can be from dealing with changes inside the four walls of their company or from external information, like shocks in the economy or supply chain issues that we experienced during the pandemic, shifting interest rates, or competitors that may be launching new products or changing prices. The amount of information coming at them, the amount of change coming at them, is unprecedented, and this puts a huge amount of pressure on decision making. Every CEO that I talk to feels this way. And they all want to know, “Am I making the best decisions in the context of this ever-changing environment?”

How enterprise connectedness leads to better decision making

McKinsey: Can you explain the concept of enterprise connectedness and how it helps companies deal with this decision-making challenge?

Charlie Gottdiener: Enterprise connectedness was part of the focus of the same research we did on decision excellence. We assessed it across three dimensions. The first is vertical connectedness—are the decisions made at the highest levels of the company, translating and trickling down to all levels, including the factory floor? The second dimension of connectedness is horizontal connectedness, so how well is the enterprise connected across functions, across business units. And the third is external connectedness, a gauge of how well companies are connected with their suppliers and their customers.

What we found was that those companies that score well on this metric make better decisions. In fact, the research showed that companies that have a percentage-point improvement in connectedness have a seven-tenths of a point improvement in decision excellence.

McKinsey: You have spoken previously about what you call the connected enterprise. What is your vision for that type of organization?

Charlie Gottdiener: From our perspective, a connected enterprise is a company that can move through decision cycles more rapidly and hence be more agile than its competition. In today’s highly competitive markets, that is a significant advantage.

It means you can observe things faster. You can orient yourself or assess the situation as new data and inputs are coming in, assess what they mean, make a decision, and then act on it. You’re better equipped to deal with things as they change, whether they’re external shocks or internal issues.

McKinsey: What does this look like on the ground for an organization?

Charlie Gottdiener: First, think about a more traditional, unconnected enterprise. In this older scenario, too much time is typically spent on bringing in data and connecting systems—which can be an intensive undertaking—and not enough time on making decisions.

In the connected enterprise, all of the time is spent on making decisions and iterating scenarios to make the best decisions. It’s a very different operating environment, one where executives can really spend their time creating value, as opposed to making sure that the technology and the data is right and that there aren’t any anomalies in their enterprises’ models.

There are numerous behavioral benefits to this model. We have found that people in a connected enterprise spend close to 50 percent less time in meetings than their peers. They also spend 25 percent more time making decisions, and 41 percent more of the decisions are made at the right level of the organization.

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McKinsey: How did this concept of the connected enterprise evolve from connected planning, which Anaplan is known for?

Charlie Gottdiener: When Anaplan started, the planning process was long and static, not dynamic at all; companies would do their financial plans every year by bringing the data into an Excel model they probably changed and manipulated for that year. Every company would run to the end to get that plan done, and it was highly manual. There were not really a lot of scenarios being run.

Anaplan solved a lot of those issues by putting the data from source systems into the platform. That data was always accurate, always clean, and it was set up to match the models on the platform. That allowed companies to do scenario planning, not just one annual financial plan. They could iterate on the plan rapidly.

That was the first version of the new era of planning. The connected piece was that as other functions in the organization did their plans—a merchandising plan in retail, for instance, or a demand plan in a supply chain or manufacturing situation—they could link those plans to the financial plan.

And customers are smart, so they innovated. They took their annual or quarterly planning and made it daily. They really created this notion of the connected enterprise by building out hundreds of use cases that are connected through their enterprise on the Anaplan platform, whether it’s sales planning, operational planning, supply chain planning, or financial planning. And all that connected information raises their ability to make better decisions faster or, in our parlance, to achieve decision excellence.

Execution discipline and the connected enterprise

McKinsey: Since you became CEO, what changes have you been instilling at Anaplan, especially to make it more of a connected enterprise itself?

Charlie Gottdiener: I’ve been CEO of Anaplan for a little over a year, and I would say we’ve made progress in our journey to becoming a connected enterprise.

Since I joined the company, we have established three operating principles. We’re strategy led, which means our key decisions are already embedded in our strategy. And that’s what guides the company. We’re values based. Anaplan always had values—most good companies do. But we changed the values to incorporate things like innovation and accountability. Finally, we are disciplined in execution.

I would say that this last principle—really being disciplined in execution—is the new muscle for Anaplan, and that’s where we leverage being a connected enterprise. To execute really well, both flawlessly and consistently, you need the right information at the right time, so you can make decisions in real time. That’s what execution really is about—the right decision making in real time, backed up by processes and talent.

So that’s what we’re doing at Anaplan, in large part by leveraging our platform. We have a whole team called AOA, or Anaplan on Anaplan, that has developed hundreds of models that help us have access to insights and stay connected across our company—whether it’s finance and sales or operations. This information flow allows us to execute with discipline, and it makes us a really good decision maker as a company.

McKinsey: What are some examples of better, faster decision making at Anaplan that are the hallmark of a connected enterprise?

Charlie Gottdiener: One really pragmatic example I think most executives will be able to appreciate is sales planning. Our sales reps have their quotas on the first day of the new year. That’s unheard of. At every other company that I’ve run or ever been affiliated with, it can take up to a quarter or more for sales producers to get their quotas.

So what does that do? It allows us to start the year with a 12-month runway. Most companies are starting the year behind, right? They launch into the year, and salespeople don’t know what they’re really being held accountable for. They may have eight, nine, or ten months with their quotas.

As I said earlier, we dynamically plan our year. We go through many iterations of our plan, but I get the information in real time. I can do a scenario every hour if I want. So I constantly hone my plan, which allows me to get territories and quotas set for day one.

The gen AI future for Anaplan and its customers

McKinsey: Anaplan’s been on a journey from financial-planning software to supply chain to sales performance management. What’s next for the company?

Charlie Gottdiener: What’s really on our horizon is doing more, and doing it faster. We’re building industry-specific solutions. We’re building applications that allow our customers to leverage our platform faster. And so, rather than building bespoke models, they’ll have a lot more out-of-the-box functionality. We’re really focused on bringing faster value to our customers with very specific solutions and more functionality so they can become a connected enterprise more rapidly.

McKinsey: What about gen AI?

Charlie Gottdiener: It’s a hot topic for everyone, of course. It is certainly on our development road map. We see AI and gen AI adding value to our customers in three ways.

The first is access. We’ll be able to leverage gen AI to give executives access to the Anaplan insights through natural language, and it’s on our product road map for this year. An executive will be able to query the Anaplan app on their phone to get insights from the models they have on the Anaplan platform.

The second way is to help companies get more predictive insight out of the Anaplan platform. We’re working on features that will generate early warnings if there are changes or anomalies in an organization’s models or that will create rapid scenario planning. So instead of a human having to create the scenario, AI will suggest different planning scenarios.

The third and last is efficiency. People talk about efficiency a lot in the world of AI. In our case, there are over a million models that we have in production today. The metadata of those models allows us to build our own LLM [large language model], to get insights about how to build models effectively. So over time, probably by next year, we should be able to automate and create efficiency for model building with gen AI, just as people can automate code building with it today.

Making better decisions away from work

McKinsey: How good of a decision maker are you away from the office?

Charlie Gottdiener: I think I’m a pretty good decision maker. My wife would tell you that I’m really good in a crisis. And I think that is primarily because I take in information very quickly, and I’m decisive. I think in a crisis; you have to be decisive.

McKinsey: And how do you spend time away from work?

Charlie Gottdiener: I work a lot, so I spend most time away from work traveling with my family. But I also have one hobby that really relates to decision making. It’s Texas Hold’em poker. In Texas Hold’em, the winners make better decisions than their competition over the long run.

And this applies to Anaplan, right? What we’re trying to do is help companies make the best decisions possible in the short run and the long run. That’s how you win in poker , and that’s how companies win in competition. They make better decisions than their competitors.

Charlie Gottdiener is CEO and a member of the board of directors of Anaplan.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.

This interview was edited by Daniel Eisenberg, an executive editor in McKinsey’s New York office.

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Wells Fargo hit with nonsolicit lawsuit over $5M in client accounts


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A man uses a Wells Fargo ATM inside a branch in New York.

Wells Fargo is staring down a federal lawsuit over allegations that it helped a newly hired financial advisor move more than $5 million in clients assets over from a smaller regional rival.

Wells Fargo Clearing Services, the advisory and brokerage arm of Wells, was sued in U.S. district court in Pittsburgh on Monday over its recruitment of Daniel Jugovich-Bejster from Huntington Investment Company. Jugovich-Bejster was an advisor at Huntington Investment, the broker-dealer and advisory hybrid subsidiary of Huntington Bank in Columbus, Ohio, for more than eight years until leaving for Wells on June 6.

Huntington's complaint alleges Jugovich-Bejster has since moved roughly 30 client accounts and $5.6 million in assets to his new employer, as well as confidential company and customer data. Those actions, according to the suit, violate various nonsolicitation clauses and similar contract provisions Jugovich-Bejster had agreed to while at Huntington.

Huntington further accused Wells of helping Jugovich-Bejster with the transfers.

Wells Fargo is improperly using Huntington's confidential and proprietary information to target and recruit Huntington employees for the express purpose of unlawfully soliciting Huntington's customers," according to the complaint.

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The judge overseeing the case, Cathy Bissoon, rejected on Tuesday Huntington's request for a temporary injunction against Jugovich-Bejster and Wells, citing a technical omission in its motion. That decision prompted Huntington's counsel to apologize and ask for reconsideration of the injunction request.

"The request for a temporary restraining order was denied," a Wells spokesperson said. "We are pleased with the court's decision, and we look forward to a full hearing on the claims."

Joseph Simms, a lawyer at the Cleveland-based firm Reminger representing Huntington in the case, declined to comment. Huntington Investment's RIA arm, Huntington Financial Advisors, listed roughly 400 employees with advisory functions and nearly $5.2 billion in assets under management in its latest Form ADV, filed with the Securities and Exchange Commission on May 14.

Wells Fargo and Jugovich-Bejster to prevent them from continuing to move client information and assets. The complaint notes that Huntington is pursuing similar allegations against Jugovich-Bejster and Wells in arbitration proceedings administered by the Financial Industry Regulatory Authority.

Wells Fargo of interfering with contracts.

nonsolicits after leaving TD Bank .

Leitner Sarch Consultants , said he generally has sympathy for advisors in these sorts of cases.

"The idea that a client's phone number that you might have had on a phone for 20 years is a trade secret like the recipe for Coca-Cola, I find that laughable," he said.

Still, Sarch said, advisors should take time to review any nonsolicits they might be under before leaving and make sure they aren't doing anything that is a blatant violation. Firms that can prove particular client relationships arose from one their own leads often have a strong claim to having proprietary control.

Jugovich-Bejster may be able to best defend himself against nonsolicitation claims if he can show that he was working with certain clients before joining Huntington. According to FINRA's BrokerCheck database, Jugovich-Bejster started his career at Edward Jones in 2011 and was at PNC Investments and LPL Financial before joining Huntington. Huntington's complaint says he lives in the Pittsburgh suburb of McMurray, Pennsylvania.

"It depends in part on to what extent they brought him clients and if they can show that," he said.

Brian Hamburger, the chief counsel of the Hamburger Law Firm, said the complications that can come with nonsoliciation clauses are one of the big reasons he and his colleagues spend an "inordinate amount of time" helping advisors through transitions from one firm to another. He said he hopes Jugovich-Bejster received some sort of legal guidance before leaving for Wells.

"But we don't know as we sit here today what their strategy was or if there was one," Hamburger said, "if this was well thought out or if they were just throwing caution to the wind."

Jugovich-Bejster, according to Huntington's complaint, accepted nonsolicitation agreements as part of various stock award deals he entered into with the firm starting in 2020. The nonsolicits prohibit from trying to drum up business from former clients for a year after leaving Huntington.

Those same stock award agreements prohibited Jugovich-Bejster from using confidential information to solicit ex-customers. And it contained a provision requiring him to provide 30 days' advance notice of any plan to resign and to "disclose any financial services entity or other competitor with which the Employee has accepted employment or is considering accepting employment."

Huntington's complaint alleges Jugovich-Bejster departed on June 6 without letting the firm know of his intentions beforehand. Huntington said its counsel sent Jugovich-Bejster a letter four days later laying out his contractual obligations.

Despite that reminder, according to the complaint, Jugovich-Bejster reached out to former clients and an ex-colleague in attempts to win new business.

Wells Fargo and provided, upon information and belief, false and misleading information about Huntington," the complaint alleges.

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US Trial Judge in Alaska Appointed by Trump Resigns Abruptly (1)

By Seth Stern and Ben Penn

A US district court judge in Alaska appointed by President Donald Trump is suddenly planning to leave the federal bench.

Joshua Kindred, who sits on the US District Court for the District of Alaska, on Wednesday submitted plans to resign as of July 8, according to the federal judiciary’s vacancies page . He was confirmed 54-41 in February 2020.

A copy of his two-sentence resignation letter posted by the court Friday didn’t provide a reason for his forthcoming departure. The district’s clerk said Kindred’s cases will be reassigned by later Friday, but her statement was silent on the reason he’s leaving.

Only one other Trump appointee, Michael Juneau, has so far left active judicial service, according to the Federal Judicial Center database. Juneau, who sat on the Western District of Louisiana, took senior status due to a disability in 2022 and died a year later. Several appointees of President Barack Obama have left judgeships since Joe Biden took office for more lucrative work in the private sector, although such a sudden departure like Kindred’s is unusual.

Kindred was born in 1977 in North Carolina and moved to Alaska when his father, who served in the Air Force, was transferred there, according to a 2021 profile in the Federal Lawyer . He worked full time at a hardware store after high school, before graduating from the University of Alaska, Anchorage and then Willamette University College of Law.

He clerked for the Oregon Supreme Court and worked as an assistant district attorney in Anchorage as well as for the Alaska Oil and Gas Association and the Interior Department’s Office of the Regional Solicitor before his nomination to the federal bench in 2019.

“It was humbling, but I realized I was one of the youngest people in the applicant pool, and I made peace with it,” Kindred told the Federal Lawyer about the judicial selection process.

( Updated with statement and resignation letter in third paragraph. )

To contact the reporter on this story: Seth Stern in Washington at [email protected]; Ben Penn in Washington at [email protected]

To contact the editor responsible for this story: Carmen Castro-Pagán at [email protected]

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Best Budgeting Apps

Compare the Top Budgeting Apps

Budgeting App Reviews
Introduction
Features to Look for
How to Choose an App
Setting Up and Using an App
Pros and Cons
Alternatives
Why You Should Trust Us

Best Budgeting Apps of July 2024: Manage Your Finances Efficiently

Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate products and services to help you make smart decisions with your money.

Budgeting can already feel difficult, but with the right money management tool, you should be able to track your spending habits, find ways to spend less and save more, or budget effectively as a couple.

50% off for new customers (offer ends July 14, 2024)

$3.99 monthly subscription or $47.88 annual subscription

Check mark icon A check mark. It indicates a confirmation of your intended interaction. Connect all your bank accounts, investments accounts, and credit cards
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Help you save for individual savings goals
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Create a budget
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Track expenses
Check mark icon A check mark. It indicates a confirmation of your intended interaction. 30-day money-back guarantee
con icon Two crossed lines that form an 'X'. Must buy a subscription (no free option)

Quicken Simplifi is a great budgeting tool if you want to create a detailed monthly spending and savings plan and don't mind paying for a subscription. If you would rather get a budgeting app that doesn't have a subscription fee, you'll have to consider other options.

Up to 50% off on Simplifi for all new customers
Stay on top of your finances in under 5 minutes per week.
Check your custom budgeting plan — anytime, anywhere!
Track your spending
See where your money is going and discover places to save.
Keep your bills in check
Find subscriptions you don't use and start saving from day one.

Check out our picks for the best budgeting apps, and read more about how we chose the winners.

Best Budgeting Apps of July 2024

Rocket Money : Best overall for reducing spending and creating a budget
Monarch Money : Best for saving toward financial goals
Quicken Simplifi : Best for robust budgeting features
Honeydue App: Best for couples

The top budgeting apps have a straightforward sign-up process, a decent fee structure, strong budgeting tools, and an overall positive user experience. Learn more about the best budgeting apps, below.

Free to create a budget. Subscription fee applies to premium services.

Check mark icon A check mark. It indicates a confirmation of your intended interaction. Connect all your bank accounts, credit cards, and investment accounts to track spending
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Bill negotiation feature
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Free plan available
con icon Two crossed lines that form an 'X'. Limited features available with free plan
con icon Two crossed lines that form an 'X'. Limited customer support availability

Rocket Money is featured in our best budgeting apps guide. While the Rocket Money app is free, there is a subscription fee if you want to use Premium features, like concierge services or premium chat.

Offers a 7-day free trial

Premium Plan with a 7-day free-trial, then $14.99 per month or $99.99 annually

Check mark icon A check mark. It indicates a confirmation of your intended interaction. Link bank accounts
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Create unlimited budgets and make customizable categories
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Track individual savings goals
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Graphs and charts that track your spending and savings
con icon Two crossed lines that form an 'X'. No free plan

Monarch Money is an overall solid option if you prioritize creating monthly budgets and saving for individual savings goals. The main downside of the app is that it doesn't offer a free plan. You'll have to a monthly or annual subscription fee.

Check mark icon A check mark. It indicates a confirmation of your intended interaction. Budgeting app for couples
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Can have individual and shared finances
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Create monthly bill reminders
Check mark icon A check mark. It indicates a confirmation of your intended interaction. Can discuss finances through chat feature
con icon Two crossed lines that form an 'X'. Only available through mobile app

Honeydue is featured in our best budgeting apps guide as the best option for couples. It's a great option if you don't want to pay a fee. It also allows you to have individual and shared finances.

Top Budgeting App Reviews

Budgeting looks different for everyone, so we selected four picks for budgeting apps. We selected a well-rounded budgeting app, one designed for couples, another that's appealing for setting goals, and lastly one with more detailed budgeting features.

We have a mix of free budgeting apps and ones that have premium plans with subscription fees, so you can choose an option based on your financial needs and priorities.

Best Overall: Rocket Money

Rocket Money (previously known as TrueBill) is our best budgeting app overall because it has a variety of tools to help you save and limit spending.

Rocket Money has both a free plan and a premium plan. With the free plan, you'll be able to link bank accounts, credit cards, and investment accounts to track spending and you'll also be able to create a budget .

The premium plan includes concierge services, which review your bills and subscriptions to help you cancel or get refunds for these services on your behalf. It also includes premium customer chat, unlimited budgets, customizable budget categories, a savings account, real-time updated syncing, and a credit score report.

The app's standout feature is Bill Negotiation. You'll upload a copy of your bill, and Rocket Money will determine whether you can get the same service with the company for a lower price. Rocket Money may also help you get refunds if you're charged bank overdraft fees or late fees.

When Rocket Money negotiates a bill, you'll have to pay a percentage (you may choose any amount from 30% to 60%) of whatever it will save you for the year. If you plan to change your internet, cable, phone, or wireless provider in the next year, you could end up losing money, though.

Pricing: You may choose how much to pay each month through a sliding scale. Rocket Money has a free plan that's $0. The Premium plan has a 7-day free trial; after the free trial, you'll have to pay around $6 to $12 per month (the lower-price plans are billed annually instead of monthly).

Rocket Money Review

Best for Couples: Honeydue App

Honeydue is a budgeting app designed specifically for couples. The sign-up process is short and simple — you'll create an account by setting up your email, then invite your partner to Honeydue.

Honeydue allows you to see both your individual and shared finances in one place. You also have to option of setting limits to how much your partner can see. When you connect a bank account to the app, you may choose to share both balance and transaction information, share information only, or share no information.

With Honeydue, you can organize your finances by creating monthly bill reminders or discussing personal financial information through the app's chat feature.

If you would like an additional place to store money for a common goal, like a holiday budget or a couple's vacation.

You won't be able to access Honeydue through your computer; it's only available through a mobile app. Some of our other top picks have both online and mobile platforms for more convenience.

Regular Pricing: Free

Best for Saving for Financial Goals: Monarch Money

Monarch Money may be worthwhile if you are looking for a budgeting app that helps you save for financial goals and create a budget. It's also become one of the most hyped-up Mint alternatives among Redditor users since Mint shut down.

Through Monarch Money, you'll be able to make unlimited personalized savings goals . You can customize goals, organize them by order of importance, and link them to bank accounts. The app also helps you create a zero-based budget, track your net worth, and analyze your cash flow.

Monarch Money doesn't have a free plan. You can try out a 7-day free trial. However, after that, you'll need to pay a subscription fee. If you do not want to pay a subscription fee for a budgeting app, you'll want to consider one of our other picks.

Regular Pricing: Premium Plan with a 7-day free-trial, then $14.99 per month or $99.99 annually

Best for Robust Budgeting Features: Quicken Simplifi

Quicken Simplifi might be a good choice if you want a budgeting app that provides a detailed breakdown of your spending and savings.

In addition to letting you create budgets with customizable categories and make individual savings goals, Quicken Simplifi analyzes your spending and savings through charts and data.

You can receive monthly reports for spending, general income, income after expenses, savings, and net worth . You can also now check your credit score through the web application if you have early access (This feature is currently only available to U.S. residents). Checking your credit score through Simplifi won't affect it.

The one major downside to this app is that it doesn't have a free plan. You'll have to pay a subscription fee, although you can try the app for 30 days with a money-back guarantee.

There's also a special promotion available right now — 50% off for new customers (offer ends July 14, 2024).

Regular Pricing: $3.99 monthly subscription or $47.88 annual subscription

Quicken Simplfi Review

Budgeting App Trustworthiness and BBB Ratings

We review the ethics of each company so you can see if a specific financial institution aligns with your values.

We also include the settlement history of the last 3 years so you're aware of any recent public controversies involving the bank.

We include ratings from the Better Business Bureau to evaluate how companies address customer issues and handle transparency.

Company	BBB rating
Rocket Money	B
Honeydue	F
Monarch Money	Not rated
Quicken Simplifi	F (rating for parent company, Quicken)

Rocket Money has a B rating due to a high volume of customer complaints.

Honeydue has an F rating because it hasn't responded to three customer complaints and it hasn't been in operation for a long time.

Quicken has an F rating because it has received a high volume of customer complaints filed, and failed to respond to 13 customer complaints.

A good BBB rating won't guarantee you'll have a good relationship with a company. You also might want to read customer reviews or talk to current customers before making your decision.

Intuit does have some public issues surrounding its tax-filing software, TurboTax.

Introduction to Budgeting Apps

Why use a budgeting app.

A budgeting app can help you understand where you spend your money. It's also useful for building and maintaining an effective budget.

The top budgeting apps let you create a monthly budget using customizable categories.

Many also help you save money effectively . For example, budgeting apps use your transaction history to make charts and graphs. You can use this information to analyze your spending patterns and figure out where to make adjustments in your budget.

Key Benefits of Budgeting Apps

The primary benefit of using a budgeting app is that it gives you a big-picture view of your financial situation.

Many budgeting apps let you link different types of bank accounts, investment accounts, credit cards , and loans. You'll be able to see all your accounts in one place and see how you're spending versus saving.

Budgeting apps also help you build better money habits. If you've struggled to maintain a budget in the past, it might be easier to track your spending on an app than completely on your own. Budgeting apps do the work for you by syncing all your accounts — you just need to make sure everything is synced correctly and make small adjustments when they aren't.

Features to Look for in a Budgeting App

User-friendly interface.

A good budgeting app has a design format that's easy to use. The app should load quickly and make it easy to get started. You should be able to create a budget on your own without much help. If you encounter technical difficulties, you should also easily be able to contact a customer representative through the app.

Syncing with Bank Account

Many easy-to-use budgeting apps for beginners allow you to sync savings accounts, checking accounts , investment accounts, or credit cards.

Apps often use Plaid to link bank accounts. Plaid can connect more than 11,000 U.S. banks and credit unions, including the best banks .

Expense Tracking

Once bank accounts are linked, your spending will be updated on the app so you have up-to-date information. A strong budgeting app will provide updates frequently, and during the same day so you can stay on top of your budget.

Customizable Budgeting Categories

Many budgeting apps allow you to create a zero-balance budget. With a zero-balance budget, you're figuring out where every dollar of your income is going. You can create budget categories for every expense. You can also create savings goals if you're setting aside money for a specific purpose, like a down payment on a home or a future vacation.

A good budgeting app allows you to make customizable budgeting categories rather than pre-set categories. That way, you can make a budget that's tailored to your life and make categories as broad or specific as you want.

Charts and Visual Analysis Features

A top budgeting app analyzes your habits so you can see how you manage your money over time. Some apps provide charts of your monthly budget so you can see how your categories compare to one another. Others might have visuals to indicate how much money you have left to spend in a certain category for that month.

Several budgeting apps also provide reports for broader areas of your finances. For example, you might be able to view your cash flow balance over several months or how your money in your retirement plans has grown over time.

How to Choose the Best Budgeting App for You

To find the right budgeting app, you need to know what features you're looking for. Are you looking for ways to cut back on spending? Do you want a free plan or a subscription plan for your budgeting app? Do you want a detailed breakdown of your finances or more of a general overview? Knowing the answers to these questions can help narrow down your options.

If you have your eye on a few budgeting apps, you can try out the free trials or free versions of each before settling on the right one. That way, you can see if the interface is also user-friendly and manageable for the long-term.

Setting Up and Using a Budgeting App

Step-by-step guide to setting up your budgeting app.

To use a budgeting app, you'll have to download it through the Android or Apple store. To set up most budgeting apps, you'll enter your name and email address. If the app charges a subscription fee, it will prompt you to sign up for a plan or free trial.

The best budgeting apps will walk you through the app's different features and help you get started. You'll typically be prompted to link accounts. Then, you can create a budget or set savings goals.

Tips for Effective Budgeting with the Apps

If you're new to budgeting apps, it may be helpful to start off with some structure.

For example, you could use a popular savings method like the 50/30/20 rule or pay-yourself-first strategy.

The 50/30/20 rule breaks down your budgeting, so 50% goes to needs, 30% goes to wants, and 20% goes to debt or savings. The pay-yourself-first strategy focuses on savings — you'll automatically transfer money from your paycheck to some of your savings and then distribute what's left over to your expenses.

Another tip for effective budgeting is to look at your expenses to see if they reflect your financial goals and values. If you have certain goals that are of higher priority than others, find ways to reduce spending in categories that aren't a priority for you. That might mean waiting before making a purchase, creating a meal plan or grocery list to limit spending on food, or auditing your subscriptions to see if there are any you can cancel.

Common Mistakes to Avoid on Budgeting Apps

Experts recommend trying out a budgeting app's free plan or free trial before committing to an annual plan.

There are many budgeting apps out there, so you want to try to find the one that best aligns with your financial needs. Testing a few apps can help you decide the best one, and it also keeps you from paying too much for a budgeting app that you won't end up using.

Pros and Cons of Budgeting Apps

Pros	Cons

Alternatives to Budgeting Apps

Budgeting apps vs. spreadsheet or diy budgeting methods.

You may prefer building a spreadsheet budget if you don't want to link all of your bank accounts or credit cards in a mobile app. However, setting up and maintaining your budget will primarily hinge on how much work you're willing to put into it.

A budgeting app does the tracking for you. With a spreadsheet, you'll have to either start from scratch or use a template. Either way, a budgeting app still offers more comprehensive features.

Budgeting Apps vs. Personal Finance Software

Budgeting apps and personal finance software share the same features. The best option for you will depend on whether you have preferences on the tool's accessibility.

A budgeting app is primarily designed for mobile experiences. Some apps also have an online dashboard which you can access through your computer, but it is always something that's offered.

Meanwhile, personal finance software is designed for computer access. You'll either download the software to a desktop or use an online platform. Some will also have apps, but some features might not be available.

Budgeting Apps vs. Savings Accounts with Goals Features

Some of the best online banks have added unique features to their savings accounts to help customers with goal-setting.

If you're specifically looking for a way to save for goals, it may benefit you to get a savings account with buckets . Buckets are customizable tools that separate your savings so you can save for specific goals. Since they are an integrated bank account feature, they also might be easier to manage than a budgeting app.

If you would rather have more robust budgeting tools, a budgeting app will likely still stand out to you. Budgeting apps also connect investment accounts, credit cards, and loans, so you'll be able to see everything in one place.

Budgeting App FAQs

A budgeting app is beneficial for tracking expenses and sticking to a budget. It can also help you save for financial goals and prevent lifestyle creep .

To choose the best budgeting app for your needs, consider what your financial goals are and how a budgeting app can best help you achieve them. If you need help cutting back on expenses, you might consider a budgeting app with bill negotiation features. If you need help with savings, you might prioritize an app that helps with goal-setting features.

Most budgeting apps have encryption to store data, making them secure to use if you're linking your accounts. To keep your username and password safe, budgeting apps might also have multi-factor authentication so they can verify your identity when you're logging in.

A budgeting app can help you understand your financial situation so you can create a budget that saves you money over time. These apps can help you find areas where you can reduce your spending. Some also offer a bill negotiation feature so you can see if you can save money on subscriptions.

Yes, there are free budgeting apps available in the Apple and Android stores, though they typically have more limited features than apps with paid subscriptions. The best free budgeting app is Honeydue, which is specifically for couples.

Mint shut down in March 2024. You'll have to switch to Credit Karma if you want to continue using an Intuit personal finance platform, or you can switch to an alternative budgeting app.

In most cases, the best budgeting app for beginners will be one that makes budgeting easy — this means it has an easy-to-use interface and links to your accounts, so you don't have to enter every transaction manually. It can also be good to have an app that teaches you about money.

Rocket Money is our best budgeting app overall, and it has a free plan. If you're in a couple, our top pick is Honeydue which is also free to download.

Why You Should Trust Us: Experts' Advice on the Best Budgeting Apps

We consulted banking and financial planning experts to inform these picks and provide their advice on finding the budgeting app for your needs.

Sophia Acevedo, banking editor, Business Insider
Mykail James, MBA, certified financial education instructor, BoujieBudgets.com

Here's what they had to say about budgeting apps. (Some text may be lightly edited for clarity.)

What should I look for in a budgeting app?

Mykail James, MBA, certified financial education instructor, BoujieBudgets.com :

"My best tip for people who are looking to start using a budgeting app is to figure out what you're missing in your financial system. For example, if you are a person who knows that you want to stick to a zero-based budget, and you've been doing that manually, but you need maybe a little bit more help with the organization, then you can center your focus on searching for apps specifically solve your problem."

Sophia Acevedo, banking editor, Business Insider :

"I would look for features that would help me with my goals. Like if I'm trying to curb spending, I would look for a budgeting app that helps me minimize payments in certain spending areas."

How do I know if a budgeting app is right for me?

Mykail James, MBA, CFEI:

"Give it time. Every budgeting app is going to feel uncomfortable during the first month. Give it at least three months before deciding if it's not something for you. Actively try and use it before considering a switch."

Sophia Acevedo, CEPF:

"I would first try out the free version and see how it works. Some budgeting apps are entirely free, while others have different plans or trials at a variety of price points."

Methodology: How Did We Choose the Best Budgeting Apps?

At Business Insider, we aim to help smart people make the best decisions with their money. We understand that "best" is often subjective, so in addition to highlighting the clear benefits of a financial product, we outline the limitations, too.

First, we compiled a list of 18 popular budgeting apps available in both the Google Play Store and Apple Store.

Then, we reviewed each budgeting app for a week. To determine our top picks, we reviewed the initial sign-up process, pricing, budgeting tools, and user experience. We also considered whether each app accomplished everything it advertised, and how regular users reviewed the product on the Apple and Google Play store.

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Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards .

Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.

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The Definitive Guide to Valuing Your Financial Planning Practice

Understanding the Components of Value

Valuation Methods

Industry Trends and Market Conditions

Challenges in Valuing a Financial Planning Practice

Strategies to Enhance Your Practice's Value

Hiring a Valuation Expert

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Six KPIs That Can Help You Evaluate Your Business

1. What assets under management (AUM) does the firm represent?

2. What percentage of the AUM is advisory business?

3. What is the gross revenue of the firm?

4. How many clients does the team serve?

5. How many employees are on your team?

6. What is your ownership percentage?

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Beyond Revenue: 8 Determinants of Valuation for a Financial Advisory Business

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2. Is Your Client Base Diversified?

3. What is the Longevity of Your Client Relationships?

4. How Are Retirement Distributions Affecting Your AUM?

5. How Consistent is Your Fee Structure?

6. Are The Buyer and The Seller’s Investment Strategies in Alignment?

7. How Strong is the Referral Network?

8. What is the Level of Client Engagement?

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