“My revenue is stable, why should I sell?”
Potential buyers much prefer to purchase businesses with rising revenue projections rather than businesses in decline. As clients age, it’s important to remember their client lifetime value decreases. Assets under management for older clientele tend to shrink over time, as they are no longer in the accumulation phase and assets are withdrawn as clients pass away. This means that in order to even maintain the value of your practice, younger clients and new assets must be added on a regular basis. Although it’s tempting to continue running your practice with the same clients and processes you have for years, this can result in decreasing the value of your business when it’s time to sell.
“This sounds great, but I’m not ready to retire yet.”
Many advisors enjoy their job and have spent most of their lifetime building a book of business consisting of clients and friends they truly care about and want to continue to serve. The good news is that selling your practice doesn’t mean you must fully retire. Even an independent can simply affiliate with a larger organization with the resources to structure deals that allow you to monetize today and retire later. These are commonly called “sell-and-stay” or “sell-and-service” models, and they’re growing in popularity.
“The sales multiples on revenue are not attractive enough for me to sell now.”
Misconceptions about sales multiples are another factor that leads some advisors to sell their practice past its peak value. Although the average sales multiples are hovering around 2- to 2.5-times recurring revenue and 1- to 1.2-times transactional revenue*, it’s important to note that these multiples are based on gross revenue before expenses and tax, rather than on take-home pay. Once expenses and ordinary income tax are factored into the equation, the sales multiples typically range from 4- to 5-times net income when expressed in terms of take-home pay.
Tax implications on income are another factor to consider**. The income earned from operating each additional year is subject to ordinary income tax, whereas income earned from the sale of your practice is subject to a much lower capital gains tax rate.
Is the value of your practice growing at a rate that outpaces the tax advantages of selling your practice at its current value? Does the estimated terminal value of your practice plus the net cash flows (take-home pay) from working additional years exceed the current market value of your practice? These are important questions to consider when assessing the appropriate time to monetize your business. Operating risk should be monitored and assessed as well. For example, market level risks and individual health status risks should also be considered when determining the marginal value of continued operation.
Next steps if you feel it’s time to sell
Whether you’re eagerly awaiting retirement or aren’t quite ready to pass on your business to the next generation, it’s important to plan your succession responsibly. Early and strategic succession planning is in the best interest of you, your clients, and the legacy of your life’s work. Here are a few best practices to follow in order to monitor and maximize the value and marketability of your practice:
Here are a few next steps to maximize the value and purchase price of your practice:
- Plan: Develop a plan for your business that considers market conditions, your book of business, assets under management, and growth strategies. Revise this plan as part of your planning cycle and treat it as a living document.
- Determine: Have a valuation of your business performed in order to understand the current value of your practice, gain awareness of its value drivers, and obtain an updated valuation annually.
- Consult: Speak to other professionals like bankers, CPA’s, attorneys, business brokers and/or business partners about your business strategy and succession plan. Also discuss this openly with key stakeholders like your spouse or family in order to create an exit strategy that satisfies your goals.
