How can financial advisors maximize the value of their businesses before a sale? The answer is to prepare for the succession years in advance, agreed experts interviewed by The Insurance and Investment Journal.
George Hartman, President and CEO of Market Logics Inc., is a financial services industry consultant and coach and author of a new, bestselling business book for financial advisors called Blunder Wonder Thunder. He says ideally advisors should start planning for a sale two to three years in advance.
Mr. Hartman says about a third of his business coaching work relates to succession planning. The main problem most advisors encounter with respect to selling their business "is insufficient time and care up front."
A question he asks advisors who are thinking of selling is: "Would you sell to anyone?" It takes time and care to find the right match, he explains. A factor to look at in finding a successor is whether the buyer fits the existing business model. "If the model is comprehensive estate planning, you don't want a high flying stock broker...you want to make sure that philosophically you are aligned."
How do you find such a match? "The best way is personal observation." Mr. Hartman suggests that in the years leading up to a sale, an advisor should look around for potential candidates. The first choice is to look within the firm. Internal candidates already share the business culture. Failing this, referrals from wholesalers or people within your network can lead to good candidates. The last resort for finding a buyer is advertising, he adds.
Taking the next step
Mr. Hartman uses the analogy of courtship to describe the succession process. Once the potential buyer is found, the first phase is "the engagement period." During this phase the seller and potential buyer must find common ground and discuss what the firm would look like after succession. This involves developing a vision for the business, culture, philosophy and working out the legal matters involved in the sale.
"Then we have the wedding," adds Mr. Hartman. This phase involves completion of the agreement, the effective transition, the official handoff and announcements.
Following this, the buyer and seller embark on their Honeymoon. This is the period where the selling advisor will stay within the business for a certain period and introduce his or her successor to clients.
Then, it is time for the seller "to ride off into the sunset," Mr. Hartman says, explaining that a graceful exit is an important part of a successful sale. Staying too long could cause clients to revert back to the old advisor, or cause the buyer to feel that the former owner is looking over their shoulder. "I've seen deals fall apart because the owner had difficulty letting go."
Cindy Jenner Cowan, Director, Training for Worldsource Financial Management, agrees that advisors should start planning their sales years ahead. She says planning should start five to even 10 years in advance. "A sale is not just an event; it is really part of your overall business plan."
Selling a business is a similar to the process a home seller follows, she adds. To increase the sale price, a homeowner will often carry out last minute renovations before putting up the business for sale. Likewise, advisors will often make improvements to their processes prior to a sale. She says advisors should make these changes years before they are planning to sell. "You could do it earlier and enjoy it."
The future of the business is of paramount importance in a sale. "The value of the business is not what it has done in the past, but what it will do in the future," explains Mr. Hartman. "We're really looking for things to anchor the business in the future." This includes the business' growth path, marketing and the types of clients that the business is aiming to attract and processes from a sales perspective.
For this reason, having a written business plan is the most important factor for increasing business value prior to a sale. This plan must explain "who we are, where we're going, and how we're going to get there," Mr. Hartman says.
Ms. Jenner Cowan says that, "At the end of the day, what really drives value is what is being transferred." She warns that historical values can be misleading in this regard. Transferability of clients within a book of business or practice, cash flow and potential for growth are the true value drivers.
Client transferability from the seller to the buyer is influenced by a number of factors including age groups, geographical locations and client service and retention methods. If the client is attached to you as an individual, as opposed to the organization, retaining the client will be more difficult (see p. 17 Take focus off yourself).
Ms. Jenner Cowan suggests developing a profile of what type of individual you would like to take over your business that details such information as what kind of products they might sell and business style, i.e., do they like to meet clients at home or in the office?
Such considerations are key to the transferability of a clientele and take time to do well, she underlines. "We've found it takes 12 to 24 months to find a successor and that you want to have another year working with the new person."
Vince Conte, a Chartered Business Valuator, and Senior Manager, Financial Advisory with Deloitte, says one of the obstacles that advisors from smaller brokerages encounter at the time of sale is that they are not prepared for the amount of information the buyer will require.
"Prepare for a long process; the buyer will have a lot of questions. You need to respect this process." The buyer needs to cover all the bases so there are no surprises down the road, Mr. Conte explains.
He adds that advisors can help this due diligence process along by preparing a comprehensive information package before the business is put up for sale. This package should provide information such as: revenue by client and by product over the last five years; client retention rate; details of key agreements with underwriters or investment managers; revenues by underwriter; employee agreements; a staff hierarchy chart; identification of key staff members and prepared answers about which clients you've lost and why, Mr. Conte explains.
He adds that the work involved in keeping excellent financial records may not pay off in a brokerage's day-to-day revenues, but the value will become apparent when it is time to sell the practice. "Good financial and operational records drive higher prices."