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Hosted by Financial Advisor Coach, Ray Sclafani, "Building The Billion Dollar Business" is the ultimate podcast for financial advisors seeking to elevate their practice. Each episode features deep dives into actionable advice and exclusive interviews with top professionals in the financial services industry. Tune in to unlock your potential and build a successful, enduring financial advisory practice.
Ray Sclafani (00:00.142)
Welcome to Building the Billion Dollar Business, the podcast where we dive deep into the strategies, insights, and stories behind the world's most successful financial advisors and introduce content and actionable ideas to fuel your growth. Together, we'll unlock the methods, tactics, and mindset shifts that set the top 1 % apart from the rest. I'm Ray Sclafani and I'll be your host. Let me ask you a question that most advisory firm leaders never hear.
What's your stock worth? By every traditional measure, you're already winning. Year over year revenues and profitability, well, they continue to grow steadily. AUM and AUA are both on an upward trajectory and you've expanded your bench strength, enhanced your value proposition for clients and appropriately scaled your team size. All of these factors indicate a thriving business.
However, as you aim to establish a valuable and enduring firm, one that you expect to either partially or fully sell to next generation partners or external investors, at some point in the future, you'll need to ask a more powerful question, what's your stock price? I understand your firm likely doesn't trade on the daily open market. It's probably not listed on the NYSE or monitored by a Bloomberg terminal.
There's been very few RIAs go IPO. However, this doesn't imply that tracking your stock price is unnecessary. In fact, I believe it's a vital metric, just not one you've likely been focusing on much lately. Imagine having a private ticker symbol scrolling across the top of all the office monitors. How would the implied share price of your firm compare to that of Apple, Meta, GM, Coca-Cola, or McDonald's?
Ray Sclafani (01:58.198)
Or for that matter, how would it fare against the broader S &P 500? You track public companies every day and analyze their investment cases. However, if you're like most advisors, when it comes to your own business, you likely stop short at basic financial metrics, failing to view it through the same lens you use to evaluate other outstanding companies worldwide. So I would propose that it's time to shift this mindset. Let's go beyond the core metrics.
start thinking in multiples, traditional metrics, while they remain essential assets under management, revenue, profit margins, employee count, client retention. These are all vital indicators of operational health. They're crucial for establishing internal goals and monitoring ongoing performance. However, these figures, when viewed in isolation, do not always represent the true value of your business from an investor's perspective. Instead, consider how a shareholder
might evaluate your enterprise. Here are four examples. The first, what's the multiple on your earnings? RIA firms are typically valued using a multiple of EBITDA, typically between seven and nine times or more. We're seeing 10 and 12 times, 12 and 14 times EBITDA. However, this can vary significantly based upon all the factors I'm sure you know, historical growth rate, age of client, client retention, leadership team, demographics, revenue, profitability.
Evaluation experts increasingly focus on discounted cash flow, DCF analysis, to provide more accurate assessments. The second is what's your free cash flow? That free cash flow is that operating cash flow minus capital expenditures. And in simple terms, it's what the business has left after covering expenses. Cash that can be used for dividends, debt, repayment, reinvestment, or any other purpose. It's a key measure of your firm's ability to generate cash and maintain operations
without heavily relying on external financing. Free cashflow can be enhanced by increasing AUM and operational streamlining, diversifying revenue streams and optimizing expenses. All that's probably a good summary for some of the team members and a recap and what you may already know. The third though is about your revenue. Is it recurring? Is it predictable? Is it scalable? One-time project fees or plan creation fees
Ray Sclafani (04:24.066)
They don't necessarily enhance valuation because they're unpredictable. Most advisory firms generate highly predictable and stable revenue through that ongoing AUM-based management fee with high retention rates. Scalability can pose a challenge focusing on proactive hiring to establish excess capacity and building advisory teams to leverage individual strengths will all enhance value. So think about specialized roles, whether it's a business development activity,
lead advisors, service advisors, marketing team, technology leaders, and the like. The last here is how effective is your reinvestment strategy? Think about reinvesting in expanding capacity and capability, adopting more efficient tech tools, enhancing your marketing, sales, ongoing communication efforts. This approach will enable you to extend service offerings that deepen your firm's impact
and improve relation stickiness with existing clients. It will also broaden your appeal to prospects and better capture emerging opportunities. So all of these efforts initially feel like they're compressing margins, but the result is higher fees, newly acquired clients, and additional revenue streams that should more than offset those expenses if you do it right. So if you're contemplating future equity transitions, whether next gen leaders or minority investors acquiring
a stake in the company, you need to convey that investment thesis for owning shares in your firm. And that necessitates thinking like more of a publicly traded company. So what do investors really buy? know, Warren Buffett doesn't just look at the financials when he evaluates a company. He famously said, it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. In other words,
Fundamentals matter. And so does your story. People buy into a company because they believe in the leadership team, the culture, the potential for future growth, and the sustainability of its competitive advantage. Therefore, your stock price is a proxy for how clearly and convincingly you've communicated that story to your internal stakeholders and potential external investors.
Ray Sclafani (06:46.158)
One of my favorite books is a random walk down Wall Street by Burton Malkiel. And he's quoted as saying the value of any investment is and always must be a function of the present value of future cash flows. So there's power in having a price. When you start tracking your firm's implied stock price, several shifts occur. In fact, I think there are four. The first is the internal dialogue elevates.
You begin discussing your business in terms of shareholder value creation. The second is your next gen team, they become far more engaged. They start thinking like investors and owners, not just employees. Number three, your strategic priorities sharpen. Decisions begin to be measured by their long-term effect on value. And number four, you become far more attractive in the marketplace. Value-minded firms garner the lion's share of investor attention, whether for succession,
&A or capital. So think about it this way. One slide, once a year, that's all it takes. If you want to embed this mindset, like what's our stock price? What's our firm really worth? I would recommend creating and updating a single slide deck each year that includes the following information. First, your firm stock price. Take the total enterprise value divided by outstanding shares. Second, what are your
assets under management and assets under advisement. Number three, total revenue. Number four, EBITDA or profits. Number five, profitability as a percentage of gross revenues. And lastly, your number of team members. Include the prior year's data alongside of the current year's metrics to track and demonstrate changes in growth and value even more clearly.
This one slide deck will capture the essence of your firm's financial DNA and valuation journey. Share it with your leadership team, discuss it with your board or key stakeholders, and use it to illustrate why your firm is worth owning, both now and in the future. Here's a final thought. Your firm may never go public, and that's okay. If your long-term vision is to build something enduring, it's now.
Ray Sclafani (09:04.888)
time to sharpen your focus on leading the firm and enhance shareholder value and create a business that attracts future shareholders. With every episode, we provide a few coaching questions. Today, there are four. First, if your company had a publicly available stock price every day, what steps would you take in the next 12 months to increase its value? Number two, how clearly can you articulate the investment thesis?
for owning shares in your firm? And how might this thesis evolve over the next three to five years? Number three, if your next generation leaders thought and acted even more like shareholders, what cultural and operational shifts would be needed to support that mindset? And fourth, which team member is responsible for updating your financial DNA slide deck each and every year? Well, thanks for tuning in and that's a wrap.
Until next time, this is Ray Sclafani. Keep building, growing and striving for greatness. Together, we'll redefine what's possible in the world of wealth management. Be sure to check back for our latest episode in order.