Knowing what makes a firm valuable can increase your nest egg when the time comes to sell your practice. While most financial advisors are pleasantly surprised that they might be able to sell their practice for five—figures, the more savvy financial entrepreneur will realize that she can sell her practice (when the time comes of course) for much, much more. If you are serious about building equity in your business, start taking the proper steps — beginning today. David Grau, president of Business Transitions in Portland, Oregon, offers the following Sage Advice. Business Transitions is a leading facilitator of buying and selling advisory, accounting, and insurance practices on its Web site FPtransitions.com.
"The most direct way to increase the value of your advisory firm is to convert more of your commission—paying clients to fees," says David Grau, president of Business Transitions. "There are striking variances in demand, asset retention after sale and valuation betweenvarious types of financial practices. The majority of buyers are looking for fee income that comes from charging clients a fair annual fee, as opposed to some of the exorbitant rates you see you many platforms," says Grau. "And what we are seeing is that fee—based and fee—only firms are worth substantially more on the open market."
An expert on the topic of how financial advisors can build equity their businesses, David has written many insightful articles and white papers on this topic. In the June 2003 issue of Financial Planning magazine, he published a good nuts—and—bolts primer on maximizing the value of your practice. In addition, the 2004 Practice Transitions Report offers incredibly valuable information. With special permission from David, we are pleased to publish below highlights of this special report.
Special note: FocusPoint Solutions is proud to have helped sponsor the 2004 Practice Transitions Report.
Fee—only practices are selling for 2:1 times their annual revenues, while commission revenues are valued at only a 1:1 multiple. The market's message is clear: To increase the value of your firm, the most powerful thing you can do is to convert your commission—paying clients to paying fees. It will double the value of your firm.
Buyer's interest in various models is a good indicator of the inherent value of advisory firms' and the direction that valuations are headed. While buyers' interest in fee—only firms is up from last year, interest in fee—based firms is up even more. In addition, if a firm has a focus on financial planning versus asset management, there is greater demand.
FocusPoint Solutions echoes David's advice. Our turnkey systems, strategies and support can help you maximize the value of your practice. Position yourself to NOW to take maximum advantage of future opportunities.
Convert to fees.
Fee—only firms sell for nearly twice as much as their commission— taking counterparts. The more clients you put under and asset management agreement, the greater the value of your firm.
Refer or sell off unprofitable clients.
Analyze your client base and you will most certainly find that a small portion of your clients generate the vast majority of your revenues. Refer those unprofitable clients to another advisor. Better yet, sell them to an advisor who is just starting out, and has the time and inclination to mine their potential, says Grau's report.
Keep overhead expenses below 30% of gross revenues;
Otherwise, the buyer may believe the client base is hard to service. If you are a sole practitioner or small planning firms, becoming a part of an ensemble firm might make sense. The economies of scale and efficiencies of affiliating with a larger firm can keep your overhead expenses in check and produce a more valuable firm. At their core, all advisory businesses are basically the same and can be run with similar efficiency. At the same time, the emotional and economic grind of running an advisory practice can take its toll on advisors. Banding together with like—minded advisors for synergy and support can make a world of difference.
Focus on what you do best
Meeting with clients and building relationships — and delegate or outsource everything else.
“As a traditional ensemble firm with over 20 years in the business, we could afford to bring on our own employees, but then we’d have to find the right people, make sure they were trained and had the right systems, supervise them, manage the human aspects that come with that type of a working relationship, create an investment committee, and more. Frankly, I don’t want the headaches that come with more people and systems.”
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