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How Value Is Determined for OSJ and Specialty RIA Practices

The financial advisor industry presents many unique challenges and considerations when it comes to valuing the business. In most practices, the value of the business is based largely on the client group and the fact that the advisor owns the client relationship. But in situations such as an office of supervisory jurisdiction (OSJ) or RIA/IMO model where the overarching business umbrella provides services to advisors in exchange for a fee and/or percentage of revenue, the value of the practice cannot be derived by traditional methods. For this reason, we reached out to Ryan Grau, VP of Business Valuation Services and Partner at FP Transitions to learn how value is determined for these specialty cases.

According to Grau, value must be determined based on the cash flows for the OSJ or RIA in question. These cash flows are net of commissions paid to reps/IAR’s, and net of operating expenses and capital needs of the OSJ/RIA. There can be some nuances between the IBD and RIA space, but in any situation where the OSJ or firm are providing resources and support to registered reps and advisors in exchange for a fee or commission, the process for determining value is largely the same.

As new hybrid models, family office models, and other arrangements evolve in the industry, valuations experts are evolving their methodologies to meet the needs of advisors and third-party professionals who work with advisors. When crafting valuation methodologies for new business models, valuations experts are responsive to the needs of lenders and other entities that need to establish good faith criteria for lending and other business dealings. They also dive deep into the business model to understand how revenue is generated, the stability of that revenue, and other relevant factors that can support key assumptions and data points that may be used to arrive at a calculation of value that will satisfy lenders, acquirers, and other parties.

If looking to value an OSJ or other business model, its best to seek out a valuations expert who is fully versed in the industry, understands how revenue is generated and maintained in each of the advisory business models, and who is recognized by lenders and other third parties as a credible valuations expert. Often valuations include a consultation to discuss the methodology used and how the calculation of value is derived. This allows firm leaders to learn the factors that influence value so they can make smart business decisions that can improve and grow value over time.