For advisers who have spent a lifetime building up their businesses, now comes the hopefully painless grand finale: selling the practice.
If the sale goes smoothly and no mistakes are made, the adviser is relatively well prepared to enter the next phase of life.
Here are some critical mistakes that sellers of advisory firms make and how to avoid them:
1. Develop a clear understanding of the value of the practice. A seller should devise a clear, easy-to-understand plan that correctly values the practice, says David Grau Sr., author of “Buying, Selling & Valuing Financial Practices: The FP Transitions M&A Guide” (John Wiley, 2016).
Often, however, many are flummoxed, and they don’t know where to start, which creates a lot of confusion, he says.
Overall, advisers often lack a clear understanding of what they have spent a lifetime building, Grau says.
2. Put together a pitch book containing the key aspects of the practice. Richard Whitworth, managing director of business consulting at Los Angeles-based broker-dealer Cetera Financial Group, recommends that sellers put together a pitch book that includes key mistakes that sellers make, as well as other aspects of selling a practice.
One mistake is failure to properly understand what he calls “the enterprise value of the advisory firm.”
Another mistake that advisers make is placing too much emphasis on the top-line, versus the bottom-line valuation approach to selling the firm, Whitworth says.
Some sellers also are reluctant to provide buyers with a complete business review and fail to communicate exit/succession planning with clients for fear that they will leave prematurely, he says.
What the pitch book should include is basics such as revenue and asset mix, a profit and loss statement, client demographics, biographies of key staff members, marketing and brand strategy, and the firm’s history and story.
3. Don’t let emotions get in the way. Dawn Drewitz, a mergers and acquisitions consultant at H.D. Vest Financial Services in Irving, Texas, says that many sellers let their emotions get in the way, and they often end up torpedoing deals because they can’t let go.
Instead, these advisers elect to continue working, she says.
The risk is that the practice will decrease in value over time, Drewitz says.
4. Make sure that offers are in the ballpark and reasonable. Melissa Mrazek says that she is skeptical of what she calls “unicorn offers.”
These artificially peg the purchase beyond the financial component, which can, for example, include an acquisition made years ago, and tend to result in unrealistic expectations in the eyes of the potential seller, she says.
Mrazek, vice president of practice management at National Planning Holdings, a broker-dealer in El Segundo, Calif., which is affiliated with insurance firm Jackson National, says that the underlying reason is that sometimes sellers don’t have a solid understanding of key drivers for negotiating terms or “don’t know how to properly structure a sale beyond the nominal numbers.”
5. Obtain Help from a neutral professional. Many advisers “should take their own advice and obtain a neutral professional to help guide them through a transaction tied to the realities of the marketplace,” Grau says.
“The valuation process matters a lot,” he says.
“Each book of client relationships is technically different. Managed correctly, this step can take valuation off the table and allow seller and buyer to focus on the details of the transition,” Grau says.
To avoid these pitfalls, these experts recommend that advisers should start the selling process early.
In addition, be prepared. Work with a business consultant who can help better analyze the business.
And don’t let emotions complicate the selling process.
This story is part of a 30-30 series on transitions.