10 things to consider before trying to sell your practiceArticle added by Jason Kestler on October 10, 2013
Jason Kestler

Jason Kestler

Leesburg, VA

Joined: August 15, 2009



You’ve spent years building a successful practice. Now it’s time to ride off into the sunset. Here are 10 things to think about — sooner, rather than later.

1. What is your time horizon?

Hopefully, you have some time to plan. Unfortunately, many business transitions take place following a health emergency or death of the owner. It is never too soon to begin planning. If you are a sole practitioner, perhaps your emergency plan is sufficient life insurance to protect your family if you die and their support disappears.

2. What is your practice worth?

Value is driven by several variables. Among these are:
    a. Supply and demand – In today’s market, there are many more buyers than sellers. However, as the average age of advisors increases, supply may exceed the demand, driving down prices.

    b. Asset mix – Although diversifying your clients (and by default, your practice) across many asset classes, a prospective buyer may only be licensed to sell some of the products you have on the books, and therefore may only want to purchase part of your practice.

    c. Recurring versus transactional revenue – Recurring revenues like fees, trails and wrap accounts generate significantly higher multiples than transactional, one-time commission products.

    d. Overhead and liabilities – can make an otherwise attractive business unappealing. The time to cut those expenses (or fire your neighbor’s wife) may be several years before a sale. This way, you can provide a prospective buyer a P&L and balance sheet with several years of high profitability.

    e. Client “stickiness” – also drives a purchase price up. Examine your book of business to determine how many of your clients have multiple accounts with you. The more points of connection you have with a household, the more your business moves from transactional to client based. No one wants to buy a business where the clients don’t even remember who you are.

3. Is your business attractive to a buyer?

A business that smoothly cranks out $500,000 a year from recurring revenues may garner three times the price of a similar business with the same income derived from 500 transactions per year. With this in mind, at least five years before your exit, you should begin positioning your practice to demand the best overall sale price.

4. Get an independent appraisal now

What you think your “baby” is worth and the price a potential buyer will offer in an arm’s length transaction may be worlds apart. Find that out early and make plans to increase the value and multiples.

5. How will your firm assist you?

Very few broker-dealers have a formal plan to assist in this process. If yours doesn’t or, worse yet, thinks they own the clients, find a replacement as soon as possible. There are companies that will help reps either buy or sell a practice, and even assist in the legal work and in some cases, financing.

6. Who do you envision as your buyer?

If a child is interested in taking over, be prepared to deal with an extra layer of dynamics. Besides the financial considerations, you are each dealing with the baggage you carry from a lifetime together — not an issue with someone from outside.; Make a list of traits you are looking for in a buyer. What licensing will they need? Are they capable of handling their business and yours? Are you confident they can make the payments?

7. A buyer is looking to grow and expand your practice, not necessarily continue yours

Too many transactions fail because a seller could not let go of the reins. Be sure you are ready to do so. Leave emotions behind. Your years of blood, sweat and tears mean nothing at this point.

8. Don’t go it alone

Partner with a professional who can provide objective advice. Those with national exposure can help to identify potential buyers, make introductions and navigate transactions. This experience can be invaluable for someone who only gets one chance to do it right.

9. Communicate with your clients

Don’t let the announcement letter be the first time they become aware of your retirement. If possible, work together with your buyer for a while so clients get used to a team approach. If they haven’t voiced it yet, they are thinking, “What happens to my account if he retires or dies?” Communicating you transition strategy adds comfort and “stickiness” for your buyer.

10. Understand your different options regarding deal terms

Although an all-cash deal may sound great, there are trade-offs. Are you buying the corporate stock (and corresponding liabilities)? Are you buying the assets only? How is the price allocated between assets and goodwill? What are the tax consequences of the sale? This is another place to get professional help.
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