I get 10 or more calls per week of advisors wanting to buy a book of business. I get very few calls, if any, per month, of advisors wanting to sell their business. I am observing a lack of creative strategy in succession planning, and as a result, a absence of successful deals. Why?
To understand the issues around selling your practice, let’s look at the numbers:
Say a practice is grossing $800,000 per year, with a net income to the advisor of $400,000 per year. This is a fine example of today’s top firms, having all recurring revenue, a client base in the mid-50s, and would be valued at 4 times annual cash flow, or $1,600,000. Under a typical structure the business owner may accept a 30% down payment of $480,000 combined with an earn-out in the neighborhood of $225,000-250,000 over the next 5 years. A good deal.
So why aren’t more advisors selling their practice when they turn or near 65?
Taking out the emotional component of this decision allows us look at it from an economic standpoint. The advisor can go through the work of finding the right buyer, negotiate a price, transition clients to the new firm, and hope that everything goes smoothly enough to get paid. Or the advisor can work another 3-5 years doing business as he has always done, and in a low risk environment, to recoup similar compensation.
Our current system is discouraging advisors from selling their practice.
There are plenty of reasons to sell your practice beyond money; quality of life, personal health, security of your clients are among the top. Yet when I take an in informal pole, most advisors comment they will work until they are no longer able to. This typically means because clients have left them, clients have died off, or their health simply won’t allow them to.
There are tremendous benefits to the client when a business has a sound long-term strategy and legacy. Should we be doing more to encourage action? Are higher multiples the answer? Perhaps more creative compensation arrangements that account for long-range client retention? And should a transition strategy be required under fiduciary standard?
One issue that can be answered today is our industry must work harder at creative succession planning to protect the value of a practice.