As someone who has spent years advising entrepreneurs and business owners through the complex process of selling their companies, I have noticed striking parallels between their journey and what financial advisors face when considering their practice transitions. While my expertise lies in helping clients navigate business sales and transitions, I have found that many of the same principles apply to our industry.
As a financial advisor, your practice is your business and most likely your most significant financial asset. How you manage that asset today could have a major impact on its value when it comes time for a liquidity event. Even if you are not part of the 37% of advisors who will retire over the next 10 years, there are issues to consider and questions you should ask yourself to ensure you have your book of business prepared for when the time comes to transition to the next phase of your life.
When Should You Start Thinking About a Liquidity or Succession Plan?
A well-defined succession plan, including next-generation advisor coverage, is crucial to your preparation. Buyers want assurance that the practice can transition smoothly without disrupting client relationships. Having a next-gen team demonstrates stability, continuity and commitment to long-term client service, which can significantly increase your practice’s value.
Further, while transactions can be intricate, the details typically fall into one of two broad categories—business or personal, with each being critical to the overall success of the deal.
The business component addresses the deal’s valuations, terms, conditions and other financial considerations. You should have your valuation consultants, attorneys, accountants, tax planners and other professionals representing you throughout this process.
The personal side of the deal focuses on how you will exit a business that you have spent a lifetime building. This includes your expectations for how your staff and clients will be treated after you leave. Starting the process at least two years before you even consider a transaction can give you the best chance for an easier and more successful outcome that is a win for all involved.
How Much Is Your Practice Worth?
In many cases, entrepreneurial small business owners get stuck on a headline number that inflates their business’s worth. Many advisors assume their book of business will sell based on AUM or total revenue. However, buyers prioritize profitability—specifically, the practice’s EBITDA (earnings before interest, taxes, depreciation and amortization).
To know what your practice is worth, you need to understand the multiples being offered in the industry. Two books of business with the same AUM can be valued very differently. Many factors can impact the multiple you could receive on your business, some within your control (assets under management, revenue and organic growth) and some not (interest rates, market performance).
Financial services firms’ valuation multiples are significantly influenced by their size and revenue characteristics. Smaller firms with lower EBITDA or EBOC (Earnings Before Owner’s Compensation) typically command lower multiples, with non-recurring revenue streams valued at the lowest multiples. As firms grow larger and demonstrate higher EBITDA and EBOC, they generally command substantially higher multiples across both revenue types, with recurring revenue again carrying a notable premium over non-recurring revenue.
Beyond size and revenue, a firm’s growth trajectory, profitability and overall sustainability can significantly influence its marketability. Client demographics, revenue concentration and operational efficiency—how well a firm manages costs, resources and administrative responsibilities—also directly impact valuation.
Is Price the Most-Important Factor?
While unlocking the value of your practice and getting paid what you deserve for all the work you have put into your business is critical, it should not be your only consideration. A good cultural fit between the buyer and seller should be at the top of the list of considerations before a deal is signed. This is especially true if you only sell a portion of your practice or plan to continue your involvement in the business for a predetermined number of years.
The most important consideration of the discussion should be a clear understanding of the buyer’s philosophy and core values regarding employee relations and client service. If you disapprove of how your business will be run after you leave, you may want to step away and look for a different opportunity.
Identifying whether the buyer is a good cultural fit should come up early in the process. Don’t always be enamored by the highest bidder.
Can You Take Steps Now to Increase Your Odds of a Successful Transition?
One of the best actions you can take today to help ensure a successful transition when the time comes is to be affiliated with a firm that empowers you to build true equity in your practice. Finding a firm that cares more about your bottom line than its own is key.
Growth is a significant driver of practice value. If you want to build equity in your practice, you need to be in a situation where you have a real opportunity to grow and to grow in innovative ways that are best for your business and your clients. A business with consistent and demonstrable growth signals to potential buyers that it has momentum and scalability. If your practice is stagnant or declining, it will be less attractive regardless of current revenue levels.
If the firm you are affiliated with is not looking down the road to see where the industry will be in five or 10 years, it may be time to move on. Your partner must invest in the infrastructure that allows you to take advantage of new technologies, business-building solutions and acquisition and succession services.