That scenario is bad for clients, and it means advisers reap no
benefits from the businesses they invested years building.
A firm is an adviser’s largest asset, says Waldemar Kohl, vice
president of practice management for Fidelity Institutional Wealth
Services. “It’s bigger than their home, bigger than their retirement
plan" so advisers should think about how they can tap that value
when they leave the industry.
Advisers who formulate a plan to sell - either via succession plan
to employees or a family member - or to an unrelated third party,
can secure a lifetime income stream and a business that continues to
serve valued clients.
After an adviser friend sold her practice for a significant sum,
Olympia, Washington-based planner Nancy Nelson sought a valuation
through succession planning firm FP Transitions. The experience was
“Cash flow can look great, but if you’re a one-man band, it’s not
attractive to a buyer because when you go, the revenue goes,” she
Based on FP’s recommendations, Nelson streamlined her firm to make
her firm buyer-ready. She created standard operating procedures and
an infrastructure that could run without her, got rid of problem
clients, outsourced compliance, and transferred the knowledge that
only she had into the company's customer relationship management
She also gave her two administrative staffers more responsibility,
to get clients comfortable with them. “I was slowly pulling myself
out, so it would be a seamless transition if I left,” she says.
[to top of second column]
Shortly after taking all these steps, Nelson successfully sold her
business to a third-party buyer and retired at 62.
While an outside sale can work out well, sellers typically can
benefit more with a succession plan that gradually transfers
ownership to insiders, says FP Transitions’ founder, David Grau,
whose firm conducted over 1,200 valuations of independent practices
last year, most in the $1.5 million to $2 million range.
Advisers who do the gradual transfer can sell for as much as seven
times the firm's annual revenue, while third-party sales tend to
brings in much less — about twice annual revenue, topping out at $1
million, he said.
The common thread among successful transitions — and the step most
advisers miss — is long-term planning.
They figure they’ll sell “someday,” but by then it’s too late, says
John Anderson, a succession planning consultant for outsourcing firm
SEI. He tells advisers to set aside one morning a week for planning,
and to expect it to take years to develop a business to the point
where it can be turned over or sold to someone else.
“A misconception is that the transition phase of handing off the
business is short,” he says. “It’s not.”
(Editing by Linda Stern and Lisa Shumaker)
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