Some Revenue Generated By Firms May Not Be Worth Much in Acquisition

Posted on November 13th, 2013 at 4:54 PM

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.

Related Attorneys: James J. Eccleston

Tags:

Return to Archive

TESTIMONIALS

Previous
Next

If you are being bothered by the Regulators, call Eccleston Law, you won't regret it.

Rick R.

LATEST NEWS AND ARTICLES

August 8, 2022
SEC Files Suit Against Georgia Advisor Over Misappropriation of Client Funds

The Securities and Exchange Commission (SEC) is filing suit against a Georgia-based advisor, Christopher Burns, who allegedly misappropriated client funds.

August 5, 2022
SEC Fines RIA $5.8 Million Over 12b-1 Fee Infractions Tied to Wrap Accounts

The Securities and Exchange Commission (SEC) has imposed a $5.8 million fine against Private Advisor Group over 12b-1 fee violations tied to its wrap fee program. 

August 4, 2022
North Dakota Regulators Seek to Close Down Advisory Firm Selling Crypto and Weed Products

The North Dakota Securities Commissioner’s office is seeking to shut down a small West Fargo-based registered investment adviser (RIA) after its owner allegedly violated state securities laws and improperly took custody of $17.8 million in client funds beginning in 2017.