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You have worked hard to build your own financial practice, and now you are want to begin the process of transitioning your firm to another person.  

Sell a Financial Practice

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Selling your financial practice by Shawn Smith

You have worked hard to build your own financial practice, and now you are want to begin the process of transitioning your firm to another person.  There are many things to consider in this process, because after all, these are your loyal clients, and they only know you and your staff, as their advisor.  They trust you, and nobody else.  You may decide to sell the practice to a relative or to a person you already have a good working relationship with, whether it be a colleague, mentor, or another advisor at another firm. The buyer must be trustworthy, have similar philosophies about their practice, someone that your clients can relate to, and they must have the financial capabilities to purchase your practice. There are many things to consider in transitioning you practice to the next person:

Finding a buyer:  As we already mentioned, the buyer must be someone who you can trust, they will probably have a similar philosophy about investing, someone who your clients can work with, as have the financial capabilities or "financial backing" to purchase your practice.  This being said, we recently were engaged in a buy sell arrangement where the seller was 100% commissioned, old school stock broker, and the buyer was more of a fee-based advisor, and the transition went well.  I think there was a level of respect that both men had for each other as they both had similar "strong personalities" so their personalities were very similar, even though they didn't run their practices the same way.  The buyer met 3 of the 4 criteria:  The seller thought the buyer to be trustworthy, he also thought that his clients could work with the buyer, and he that had the financial capabilities  (in his case the financial "backing" of his broker dealer)to purchase the practice.  The buyer in this case also had a proven "track record" of buying and converting other practices which also added to his capability of being successful in this endeavor. 

Practice Valuation:  Valuing your practice is important but it isn't the final price tage of your practice.  Third party CPAs who are knowledgable in this area are usually your best bet in a practice valuation.  A good estimate that we have found is multiplying your commission gross revenue by 1 and your recurring revenue by 2 to 2.5 times, is a good estimate as to the range of where your value may fall.  There is a very good chance that your valuation will fall into this range, however we have seen values fall above and below this range also.  Today, the number of buyers out number the number of sellers, we refer to this as a "sellers market", so depending on the circumstances, values can at times be in the higher range.

Terms of Sale:  Once a price of the practice is determined, the task of negotiating the terms of the sale are paramount.  You will also want to transition the sale over time to ensure that the clients will stay with the buyer.  The amount of time that the seller stays on transitioning the practice to the buyer will be indicated in the terms of the sale.  You will want to stay on for at least a year or two minimum for the clients to gain trust in the new adivisor. This will ensure you that you get the best price available.  The buyer and the seller will need to be registered with the same broker dealer during this time, so the buyer or the seller may need to move their practice to the other's broker dealer, assuming that they weren't initially at the same firm, which in this case, they would just stay at the same firm.  Don't think you have to stay at your current firm in order to sell your practice.  Doing this may cost you the best offering price, as when there are more buyers interested in your practice, you will get the best price possible.  It is simple economics, demand out strips supply, and increases the market price.  In addition to the practice revenue valuation you must add hard assets to the price such as office realestate or lease, furniture, computers, office supplies and other tangible assets. Staff members are a very important part of your practice, sometimes they have as good of a relationship with your clients as you do (sometimes better).  You must determine how long staff members will stay on with the new buyers, and this must be spelled out in the contract.  Will there be any bonuses for the staff to stay on with then new buyer?  This must be determined before execuring the sale.

     The practice will be sold either through financial terms spelled out in a promissory note, which holds less risk for the seller or through an "earn out" process, which is riskier for the seller and holds less risk for the buyer.  The promissory note will have specifice dollar amounts to be paid to the seller at certain "mile stones". For example, the seller will receive an initial payment, which is usually around 25-40% of the valuation.  So let's say that a practice was valued by a CPA to be $1,000,000.  The initial payment could be $300,000 which is due at the closing.  The second payment may be at 12 months, say another $300,000, and the final payment at 24 months, $400,000.  Of course there will be some clauses built into the promissory note that spells out certain circumstances to receive full payment, such as a certain number of assets that is expected to be transitioned over to the buyer, etc. in order to receive 100% of these payments.  In an "earn out" process, there is a down payment, but after that, payments due the seller are predicated by the revenue that is generated by the transitioned book.  For example, assuming the same sales price of a practice which generates gross revenue of $500,000 and is 100% recurring revenue. The book's sale price is agreed to be $1,000,000 with an initial down payment of $300,000.  This practice was sold for 200% of gross revenue.  Under an "earn out", the seller reveives the initial 30% at closing and the rest of the $700,000 "target" will be "earned out" over 3 years, or $233,333 per year.  The buyer may assume that the practice will generate 500k per year, as it did before, so he may determing that the portion of the gross revenue over the next three years which is paid to the seller is the following:  48% of the revenue that is generated in the first 12 months, 47% of the revenue that the book generates in year 2, and 46% of the revenue that the book generates in year three. If the revenue is 300K in the first year, 400Kin the second year and 500K in the third year, the seller would earn, $144,000 first year, $188,000 second year and $230,000 in year 3. So the total payment for the earn out is:  $300,000+$144,000+$188,000+$230,000=$862,000 which is less than the $1,000,000 goal.  So with earn outs, there is less risk on the buyer, and more risk by the seller.

Transitioning your clients:  Keeping the largest number of clients in your practice during the sale will increase the value of the practice. It will be important to have face to face introductory meetings as well as quarterly reviews.  The client should be told of the changes that they should expect, and any value that you can add to the relationship during the transition to the new owner, should be articulated during the initial meetings.  For a client to receive more from your practice is always valuable, and will ensure that the relationship remains positive.  It will take several quarterly meetings for your clients to become comfortable with the new owner.  You can't alwayas assume that your clients will move to the next owner, it is very competitive out there and they may look at this event as a reason to look at other advisors to move to.  You will need to "earn their business" during this process to make the transition as successful as possible.