Exit, Stage Left

As a financial advisor, do you think you'll work till you drop? Or do you think you might actually retire and enjoy the good life someday. If you decide to sell, here's how your practice might be valued.

David R. Evanson

The Career Advisor, Winter, 2004

Well the good news is that there’s probably more value in your practice than you thought, perhaps two times your gross – even if you are a one-man band. And even better news, there is an active pool of buyers out there that will—ahem—take you out. This according to David Grau, founder and president of Portland, Oregon-based Business Transitions, which assists business in buying and selling financial services practices.

To optimize the sale of your practice, it pays to think long term, though he says that some practices are sold at full value and then some, even though the owner never thought about cashing out till the end. To avoid relying on luck, here are some long-term considerations.

Educate Thyself. First, educate yourself about the process and the pricing. Though the rough metric is that a financial planning practice might sell for two times gross revenues, there are a lot of factors that play into a premium or discount, and it pays to know what they are, as well as the costs, times lines, traps and opportunities.

Timing is Everything. Get out at the top. Grau says that as some planners get older, they work less and rely more on staff. The problem with this he says is that staff is overhead, and value and overhead run inversely. “Decide to sell while your practice is still growing and work hard to the end.”

Be the Geek. Continue to invest in technology. “Technology is very important to buyers,” says Grau. “They have to be efficient, and they have to be able to do more with less once they take on your practice.” He says if the hardware and software running your practice is old or outdated, it will detract from the price. “From the buyer’s perspective, it will have to be replaced, or it will result in higher transition costs, or both, and as a result, they will be willing to pay less.”

Drop Hints. Finally, as a long term consideration, clue clients into the process. “You don’t want to spring anything on them near the time of the sale because that might have unfavorable consequences on their decision to keep their assets with the buyer,” he says. “Just let them know you are thinking about it. Make it a topic future planning so it can be blended into the client’s long term plan.”

When a sale of the practice is in the immediate future, Grau says to consider these strategies to enhance value:

Try To Trim Expenses. The value of your practice might be expressed in relation to gross revenue, but the premium or lack thereof is based on the net cashflow. As a result, says Grau, a reduction in expenses increases the buyer’s cashflow and increases the likelihood of earning a premium on the sale. Typically, overhead is between 37% and 42% of a practices’ gross, not including owner’s compensation. According to Grau, most likely place to cut expenses: personnel.

While you’re at it, you might as well get rid of deadwood in the book, too, by trimming the bottom tier of clients that would not hit your current minimums. “Every client that can be transferred has value,” says Grau, “but as a going concern, there may be more value and better terms if attention has been paid to shaping the practice to have more high-net-worth clients with lower overhead.”

Get Non-Competes. Next, you’ll want to reduce the risk your employees present to buyers. If you have employees that are licensed says Grau, you want to get non-solicitation, or better yet, non-compete agreements from them. “If an employee has some influence over a client relationship, and can possibly walk away with that client, the buyer will consider this a liability.” This will either detract from the overall price he or she is willing to pay, or put clients that could be controlled by an employee on a contingent basis. “A buyer would never pay cash for them.”

Hang On To Your Lease. Grau says most buyers want to acquire a lease as part of the purchase. “Continuity, post-closing, is very important to the buyer from a client retention perspective.” So he says things like keeping the office open and keeping the same receptionist in place will be viewed with a high level of interest from most buyers.

Grau reports the above strategies and suggested timing apply to fee-based practices. He says that commission-based planners may want to consider taking the time to shift to a fee-based arrangement, because these practices often fetch a higher price in the marketplace.

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