When it comes to your RIA, not all growth is created equally. Firms with a sustainable organic growth model can receive a significant premium to the valuations that slower growing firms would receive. Understanding the consistency and repeatability of the demonstrated growth is critical to determining the appropriate impact on valuation.
While periodically adding large clients in a “lumpy” fashion can certainly be valuable (especially when it has occurred consistently in the past), this kind of growth tends to be less predictable on a go forward basis. Like commission-based revenue, this kind of growth is given a lower valuation as a result of the lessened predictability of future cash flows. Repeatable strategies to consistently drive growth and a clearly defined path for these to continue into the future, on the other hand, may be valued more highly as there is more predictability.
In many ways, the value of the growth a firm has demonstrated boils down to the repeatability and predictability of the strategies being leveraged. Companies that can consistently drive growth are rare, and as such, those who have firms with organic growth strategies that can be repeated in the future will have an increased valuation relative to those that do not. However, there is nothing more valuable than maintaining a high level of service to existing clients on an ongoing basis.
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