Do you dream of total retirement, or simply working less? Would you like to form a partnership, keep part of your clientele? You should figure out all the answers to these questions before setting a price. But, above all: segment!
In a nutshell, segment your clientele and reflect deeply on your future before setting a price. Otherwise, you risk selling at a discount. This was the core message from Tony Bosch, executive vice president, broker development, at HUB Financial, in an interview with The Insurance and Investment Journal.
For an advisor to fulfill his expectations when selling a block of business depends on his succession planning, says Bosch. “A successful planning breaks down goals and business fit with the buyer. You have to discover what you truly want. Do you want to sell and move on to another thing? Do you want to continue (what most advisors want), or to partner with someone else? You must realize that it can be challenging to partner together. A partnership may look great on paper, but you have to understand the personality and style of the other person. Your relationship with him has to be well defined,” he says.
Focusing on price
Unfortunately, most advisors focus on price and don’t think about the transition they’d like to make. “In addition, few advisors have a well structured clientele. You have to structure your clientele today, not in five years, even if you are 25. Otherwise, a buyer that needs twelve months to go through the due diligence, and has to invest much energy to integrate the block will come back to you and say, ‘It doesn’t have that value’. Advisors who sell have to ensure their business can be easily integrated by the seller and make sure it’s profitable,” he says.
Explaining why most practices are not properly structured, Bosch enumerated key aspects that advisors tend to overlook. “You must have a financial understanding of your business. A lot of advisors don’t have good records of the breakdown and history of their revenues. Staff members’ roles and processes aren’t clearly defined. Are processes standardized? Can they be duplicated in the buyer’s business?” he asks.
Another flaw Bosch observes within the clienteles of the advisors he coaches: lack of segmentation. “You have to see clearly who you have as clients, the level of service they require, the level of revenue they generate, so the buyer can see how to manage the clientele.”
Shirley Marquis, associate director and vice-president, sales and business development, of SFL des Sources Financial Centre, also recognizes the importance of segmenting clientele before transferring it.
“We are working hard on helping senior advisors know their segments. We do not transfer 700 clients to a recruit in a day. The senior advisor could, for instance, start by transferring bronze clients, then silver, and eventually, gold. Maybe he would continue to serve his platinum clientele. He could plan that 10 to 20 per cent of his clientele be transferred to a junior over the next years,” explains Marquis.
George Hartman, president of the consultation firm Market Logics and author of Exit is Not a Four Letter Word warns against segmenting too much. “We all know Pareto’s Principle, which suggests that 80% of your revenue comes from 20% of your clients. When we look at profitability, however, we find that 100% of the profits come from less than 20% of your clients. If you decide to keep working with only your top clients, you are effectively saying to the buyer, ‘I am keeping all the profitable clients – you get the unprofitable ones.’ If you are selling the 80% that is unprofitable, you should receive less than 80% of the value of the business.”
Hartman says there could be opportunities in less profitable client segments. “For example, if you have segmented your clientele into A, B, C and D clients, some of your C and D clients could become A and B clients for another advisor because of timing, different relationship dynamics, etc.”
Checklist of risk factors
His book contains a checklist of risk factors to help advisors evaluate their practice according to about 50 criteria to which they can attribute a positive, negative or neutral score. Many of these risk factors relate to segmentation: Is the average age of the client base attractive to the buyer? Is there a high concentration of clients representing significant revenue? Is there an effective client segmentation regime in place? Is client retention acceptable?
“I currently use [the checklist] to determine what factors might have a positive (premium), negative (discount) or neutral impact on the value of a practice. We don’t have a scoring system that says so many of each category results in a certain valuation. However, if a practice has, say, 30 premium, 10 neutral and 10 discount ratings, it probably is an above-average business that warrants a higher valuation,” says Hartman.
He adds that he will normally use his judgment regarding what justifies a positive, negative or neutral rating, but he keeps in mind that what he thinks is a negative, might be viewed as a positive by someone else. “As an example, I may think not having a marketing plan is a discount, but the buyer might think, ‘Good, I can put my own marketing plan in place and rebrand the business in my image.’ Similarly, I may feel that a business too concentrated in one type of product warrants a discount, while a buyer might look at that as an opportunity to introduce new products.”
A general rule: anything that reduces the risk associated with a practice increases its value, says Hartman. “For example, the larger the percentage of recurring revenue through insurance renewals, trailer fees and fee-based arrangements with clients, the higher the valuation. Note that in valuing insurance practices, we do not take into account first year commissions because, while they may be $100,000 this year, we do not know what they will be next year under a new advisor.”