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Financial advisors in their late 50s or 60s may be getting attention from would-be suitors. If buyers are courting you, perhaps you can sell your practice on your own schedule and terms. And why not? Valuations for financial planning practices are at all-time highs; consultants tell me there are 50 buyers for every seller.
However, having 50 experienced buyers lined up to buy a practice isn’t reality.
Usually, the number of experienced buyers is two or three. As someone who has completed transactions and has walked away from a number of others, getting a deal done is more complex than putting out a “for sale” sign.
Consider the buyer’s point of view
To get the highest value, consider the buyers point of view.
While the seller walks away with a check, the buyer assumes the risk and work associated with onboarding the acquired business.
A buyer will pay a premium for a practice with less risk and less work.
Regardless of whether your sale is strategic, out of necessity, or due to retirement, how will buyers evaluate what you are selling?
Are you selling clients or a business?
Among the many factors experienced buyers consider, a key one is that the seller needs to demonstrate that your practice is a business and not a collection of clients. Let’s define the difference.
A practice that can be characterized as a collection of clients is one that serves fewer than 150 clients. In most offices like this, client contact and service is ad-hoc, through a highly personalized and à la carte basis regardless of the client’s investment portfolio. Additionally, each client’s portfolio includes different funds, securities, and individual strategies. In this practice, the advisor wears all the hats. While the advisor may be proud of the customization and personalization they provide, it can stifle a practice’s growth prospects and makes it less valuable to a buyer.
A practice that can be characterized as a business reflects systemization and repeatable processes. There is a well-articulated philosophy of portfolio construction and often models are incorporated. Revenue sources are concentrated in one or two product types, such as asset- or planning-based fees. Client meetings are held on a specific schedule. There is often a staff member responsible for delivering consistent client service. Finally, the business has a well-defined target client.
A practice that is run like a business carries considerably less risk because the buyer can more easily duplicate and deliver an experience familiar to the client. Additionally, a business model eases the transition for the buyer because there is a repeatable system rather than individual customizations.
Moving to selling a business at maximum value
If achieving maximum value while creating the best client experience is important to you, how do you turn your collection of clients into a business?
When you sell a business, you are selling a business. You are not selling yourself.
Imagine you are stepping away from your practice for three months. What instructions would you leave a staff member to continue to run the business effectively? Did you think about everything? Any instruction, such as stock-picking acumen, that cannot be documented and duplicated by someone else has little or no value to your potential buyer.
To add value to your business and lower risk for your buyer, create an investment policy statement for your practice and identify commonalities among portfolios. Shifting portfolios into more consistent models does take time.
If your client service model is reactive versus proactive, institute a three-tier model of contact with your top, medium and lower end clients. Develop a proactive meeting schedule.
Finally, start today! Most advisors underestimate how long it takes to prepare a practice for sale. Sellers sometimes underestimate how long they have to stick around to create the best client transition experience and to endorse the changes the new advisor will inevitably make.
The changes you make to move from selling clients to selling a business takes time, adds value, and leads to fewer “no thank yous.”
An immigrant to the U.S., born in Latvia, Nathan Munits understands that a better tomorrow is possible and is dedicated to helping people of all backgrounds and lifestyles feel welcome and realize their own dreams. As president of Longwave Financial, Nathan holds the CRPC® designation and is an Accredited Investment Fiduciary® designee.
Read more articles by Nathan Munits
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
