The shorthand method of valuation in many industries has long been some kind of “rule of thumb,” usually a multiple of some measure of gross scale or activity. In this post, we consider the pitfall of relying strictly on a rule of thumb.
A weekly update on issues important to the Investment Management industry
The shorthand method of valuation in many industries has long been some kind of “rule of thumb,” usually a multiple of some measure of gross scale or activity. In this post, we consider the pitfall of relying strictly on a rule of thumb.
In this week’s blog, we present a new whitepaper with some summary thoughts on the valuation of RIAs. Understanding the value of an asset management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, asset management firms exist in a narrow space between client allocations and the capital markets, and depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the particular risks and opportunities of a given asset management firm is fundamental to developing a valuation.
