How often have you looked at a book’s cover, studied the title and then had to read the synopsis on the inside flap to determine exactly what the book is about? That won’t happen with How to Value, Buy, or Sell a Financial Advising Practice: A manual on mergers, acquisitions, and transition planning by Mark Tibergien and Owen Dahl. The title says it all and the contents match the title.
Many readers will recognize Mark Tibergien’s name. He is the financial planning industry face of U.S. accounting firm Moss Adams LLP, co-author of Practice Made Perfect: The discipline of business management for financial advisors, and a frequent conference speaker who brings validated academic insights into what makes a great advisory practice. As a consequence, he is eminently qualified to give advice to both buyers and sellers on how to ensure each receives good value, regardless of which side of the transaction they represent.
The timing of the book is perfect. The average age of advisors in North America is now approaching the mid-50s (even older in some sectors), and the next decade or so will see many practices change hands, some for fair value, some grossly overpriced and far too many for values that fall far short of what the people who spent their lifetimes building them think they are worth.
Getting at true value is an inexact science because, as the book notes, value — like beauty — is in the eye of the beholder. What appeals to one buyer may not appeal to another. If, for example, you are an investment advisor building your business following a wealth-management approach, a transaction or product-based practice may be worth less to you than one of the same size that more closely matches your philosophy. On the other hand, someone else might look upon such a difference as an opportunity to tap a new market with his or her approach.
Furthermore, while valuation methods haven’t changed much over the years, the complexities and vagaries of a modern-day financial advisory practice can’t always be accounted for by traditional formulas. Intuitively, we know that “all practices are not equal” so we need something other than simple multiples of this or that to assess them fairly. A $1-million practice that is growing and has 60% recurring revenue, for example, should be worth more than a declining $1-million practice with 90% of its revenue from new transactions, which must be replicated year after year. These are some of the reasons the authors do not favour “rules of thumb” or industry benchmarks to judge a firm’s value.
The book is sectioned into six parts that cover three key areas. The first six chapters address the valuation process itself — uncovering the fiscal health of a practice, choosing the appropriate valuation approach (income vs market vs merger) and accounting for the differences in business model (sole practitioner vs multiple-partner firm). Two case studies are included to highlight the key considerations.
Chapters 7-13 address the topic of negotiating terms and conditions. There are important sections on the essentials of due diligence and crafting legal agreements. The last part of the book brings many of the non-factual elements into consideration, such as using intermediaries to help make the match, identifying and finding the ideal buyer and building a firm that “sells itself.”
Moss Adams conducts an annual study of the financial performance of advisory practices for the Financial Planning Association. Happily, the book is not an advertisement for that research. Instead the authors use the findings as a tool for you to compare your firm’s financials with the averages shown in the study. The numbers are primarily from the U.S. and, similarly, there are references to U.S. tax law. The writing is characteristic of the title — not fancy, just the facts. I wouldn’t let any of these things deter you from using this book as a foundational reference.
Even if you don’t plan to sell or buy a practice in the near future, you will reap tangible benefits from this book. Its key messages are as relevant to managing your business today as they would be if you were buying or selling. They include:
> Be clear about your goals.
> Build a documented history of your business.
@page_break@> Benchmark your business against industry standards.
> Plan how to close any gaps.
> Work to improve cash flow, minimize risk and manage growth.
Most important, remember that value is a function of future promise, not past results. Organizing your business to achieve its full potential will always be rewarded. IE
Tips on buying and selling a planning practice
And even if you don’t plan to buy or sell, this book holds valuable information for your business
- By: George Hartman
- May 29, 2007 May 29, 2007
- 09:59