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Case Study – Valuation of Wealth Management Firm

Case Study #5 – Valuation of Wealth Management Firm

Company X (company details removed for privacy purposes)

InteleK was engaged by the owner of a wealth management company to determine a reasonable valuation range for a minority stake in the company and facilitate negotiations among shareholders. With over 20 years of experience in the field, the owner had built a strong reputation and established close relationships with clients.

Several key elements were relevant in this engagement:

  • The substantial amount of personal goodwill impacting business value.
  • Above-average risks due to the legal context surrounding the valuation and other company-specific risks.
  • Industry-specific standards and practices that needed to be addressed based on empirical evidence.
  • The growth of the business, which relied heavily on the performance of assets under management (AUM) and the overall evolution of financial markets.

To address these unique challenges, we enhanced our standard valuation framework and tailored it specifically to the circumstances of the wealth management company, distinguishing our approach from generic solutions offered by other valuation practitioners. Our methodology included the following considerations:

  • Emphasizing the defensibility of key assumptions, particularly in a legal context. For instance, we recognized that assuming perpetual growth was not appropriate given the nature of wealth management practices, the prominence of personal goodwill, and the age of the owner.
  • Supporting our position with industry statistics and analyzing various value drivers and risk factors within the wealth management industry, including investment strategies, client demographics, transition risk, attrition rates, common M&A deal structures, and the quality of cash flows, among others.
  • Determining an expected return for the portfolio (AUM) based on the company's investment strategies. This served as a primary revenue driver in the absence of other growth sources.
  • Modeling eight different scenarios to account for various transition conditions, attrition rates, and cost of capital assumptions, considering the high level of uncertainty surrounding the valuation.

By understanding the nature of the industry and addressing specific risks faced by the business, we provided a tailored and highly defensible valuation range. This valuation range served as a valuable guide during negotiations among shareholders, assisting them in reaching an agreement based on sound financial analysis and industry expertise.

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