A recent u.s. survey revealed the No. 1 way people expect to fund their retirement is by winning a lottery. What fantasy. Everyone in the financial services industry scoffs at the very idea of people thinking dumb luck could play such an important role in their lives.

Yet, talk to financial advisors about their own retirement plans, and you’ll discover how many of them have fallen into the same kind of fallacious thinking. The lottery that advisors expect to win, however, is not one in which they pick a winning number but, rather, one in which they simply choose the highest bidder for their practices.

Over the past couple of decades, large parts of the financial services industry have migrated from being captive sales forces to being independents, fostered at least in part by advisors’ desire to “own their books.” Ownership means control; ownership means building something of tangible personal value; ownership means being able to sell your business when you want to whomever you want.

But does it?

Those things would all be true if there was an active market for retiring advisors’ practices. That market will evolve over the next 10 years. But, even then, it won’t be a “seller’s market” as it is now. It will be a market in which the buyer calls the shots, and that will dramatically change the odds of advisors funding their retirements in the manner they envision today.

There are two major forces at work in designing this new landscape. First, there are the simple demographics: the average age of advisors throughout North America today is in the mid-50s, and there are relatively few young advisors entering the business. Over the next 10 years, more advisors will be looking for an exit strategy and the supply/demand curve for practices for sale will shift toward the supply side. Economics 101 tells us that will lead to lower prices as sellers begin to outnumber buyers.

That’s the first adjustment to their retirement plans advisors will have to make: their practices won’t be worth as much as they think they will.

The second major force is a result of the first. As buyers predominate, they will become far more discerning about the type of practices they will buy. They will dig deeper into the business to determine what made it successful; they will analyse the extent to which existing revenue, both new and recurring, can be sustained and, presumably, enhanced. They will look for compatibility with their existing business in terms of product mix, preferred suppliers, investment philosophy and attitude toward client service. Corporate structure, staffing and systems will all come under scrutiny, as will the brand that has been built in the marketplace.

Most important, they will attempt to assess the extent to which the practice being acquired is dependent on the advisor’s persona and long-standing relationships with clients and the community. In some instances, purchasing the business of a high-profile advisor is an advantage, due to the existing client capital and reputation that comes with it. In other instances, much of the goodwill can walk out the door at the same time as the retiring advisor does.

So, if you are one of the multitude of mid-50 advisors (and even if you are not), what can you do to maximize the value of your practice and minimize the risk to your own retirement plan?

The good news is that the process is one with which we are all familiar because we use it every day with clients. Determine where you are today, develop a vision for where you want to be, analyse the gap in between and implement a plan to close the gap. Start with the “30,000-foot view” and add details as you proceed with the exercise.

Take a piece of paper and draw two vertical lines dividing it in three columns. Label the first column “my practice,” the second “today” and the third “the big day.” Note that “the big day” doesn’t have to mean full retirement. Many advisors intend to work with a smaller number of clients or significantly reduce their hours. Most purchasers of books of business also want the vendor to stay involved for a period of time to make the transition. At some point, however, there will be a transfer of ownership or authority. Use that date as your “big day.”

@page_break@In the first column, list what you feel would be of interest to a prospective buyer. Put yourself in the buyer’s shoes and imagine what you would want to know about any potential acquisition. That list might include:

> Business definition

• Vision

• Values

• Mission

> Current situation

• Client profile

• Client base

• Product mix

• Number of sales

• Average size of sale

• Seasonality of business

• Cyclicality (impact of markets on business flow)

> Swot analysis

• Strengths

• Weaknesses

• Opportunities

• Threats

> Strategy

• Marketing plan

• Promotional strategies

• Sales process

• Relationship management plan

> Structure

• Systems

• Technology

• Staff

• Skills, knowledge and expertise

> Financials

• Income statement (one, three and five years)

• Accounts receivable and payable

• Balance sheet

• Cash flow analysis

• Break-even analysis

• Pro forma projections

Complete the other columns by assessing the situation today and down the road, relative to each area of your practice. One of the most revealing ways to do that is in parallel. For example, simultaneously describe your client base as it exists today and as you think it will look on “the big day.” What will appeal most to a buyer? If the difference swings in favour of the latter, do you have plans in place now to effect that change? If the current situation is better, what can you do to prevent deterioration?

Questions such as these form part of your gap analysis — identifying the things you need to do or improve to present your practice in its best possible condition when you offer it for sale. Whatever has been identified as essential to change needs to be incorporated into an action plan. Some of the requirements will be relatively easy to meet, such as ensuring that you have accurate financial reporting in place so a prospective purchaser can track the progress and momentum of the business. Others may require significant change over time, such as a decision to upgrade your market or clientele.

Look particularly carefully at what you personally bring to the table today that won’t be there once you start your retirement process. If your strength is on the technical side of planning, consider how that expertise can be replaced. If networking and marketing are your forte, how can you make the business less about your relationships and personality and more about a firm that has multiple talents who can continue to meet client needs?

Even if you intend to walk away from your business entirely, you should have an interest in its survival — as your legacy or because its ongoing success affects your compensation for the sale. So be thoughtful about this exercise. The payoff will be a winning ticket in the practice-for-sale lottery. IE



George Hartman is a coach and consultant with The Covenant Group and can be reached by e-mail at george@covenantgroup.com.