Some Revenue Generated By Firms May Not Be Worth Much in Acquisition
From the Desk of Jim Eccleston at Eccleston Law Offices:
Certain revenue that a firm generates may actually reduce its valuation in an acquisition. The M&A market wants revenues that both are recurring and stable. The market severely discounts non-recurring revenues because of the unpredictability of the future cash flows.
The “right” kind of revenue includes, among others, the “fee-only” model, in which advisers are compensated directly and exclusively by their clients. In addition, history has shown that fee-only firms with this type of billing arrangement have remarkably low rates of client departure. Other revenues that likewise are recurring and somewhat stable include: retainer fees and family office types of service fees.
On the other hand, the “wrong” kind of revenue exists. First, trading or product-based commissions. Commissions may generate an immediate rush of cash flow in the short-term but have a long-term negative impact on valuation, as there is a risk that they are non-recurring. They also may create a structural conflict of interest between adviser and client which could jeopardize the future stability of client relationships. Moreover, trails are considered to be the “wrong” kind of revenue. Those factors affect the valuations as well as the way we advise both buyers and sellers of advisory firms.
The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.
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