If you’re considering selling your financial services practice, you may have a target value in mind. After all, no one knows your practice better than you, so it makes sense that you should have a firm grasp of its value.
However, very often, advisors land on a target value without considering all of the factors involved. Potential buyers are going to examine your practice with a critical eye and their value drivers may be different than yours.
If you don’t look at your practice objectively, you could start the sales process off on the wrong foot. An asking price that’s too high could scare away potential buyers. A price that’s too low could result in money being left on the table.
Before you begin the sales process, consider the following factors:
- Is your revenue mostly fee or commission? A practice that is primarily fee-based is always going to have a higher value than one that is built on the sale of commission products. The reason is clear. The fee revenue is recurring, predictable, and consistent.When an advisor buys a practice that is built on the sale of commission-based products, he or she is faced with the dilemma of servicing clients that aren’t generating revenue. Yes, there may be opportunities to move those clients into fee-based services or new products. However, the clients may have to wait out a surrender period before switching. A potential buyer will likely discount the value of those clients.
- How old are your clients? Are they withdrawing funds or still saving? This speaks directly to the potential growth of your practice. Any potential buyer will likely want to build on your success by growing the practice. Clearly, that process will be made more difficult if your most of your clients are in retirement and are already withdrawing funds. Consider, if most of your clients are taking required minimum distributions, that’s a two-to-four percent headwind the new advisor will have to overcome every year.Most advisors will prefer a book of business that has a significant number of younger clients who are in their peak earning years. Those clients are likely to add money to their investment accounts, which gives the advisor a head start on growing the practice. The demographics of your book is one of the key value drivers that a buyer will consider.
- Do you meet with your clients regularly? There’s no shortage of research showing that advisors who meet with clients on a regular basis are more likely to keep those clients for longer periods of time. Much of the value of your business is dependent on whether clients will stay on board through the transition. If you’ve developed strong relationships with the clients, a buyer may consider that to be worth a premium. If you have little regular contact with clients, a buyer may pay less.Remember, there are more value drivers in a financial practice sale than just assets under management and the previous year’s revenue. Buyers are going to dig deep into your practice before making a purchase decision. You can speed up the sales process by analyzing these value drivers before you begin the sales process. By taking an objective look at your business and pricing your practice appropriately, you’ll be more likely to find the right buyer in less time.