The art of selling your book

Coach says: Fewer than one in four financial advisors have an adequate succession plan in place, and the demographics of the advisor population dictate that this will become an even more important topic in the years ahead.

Timing is important. My experience is that the more time you put into your succession plan, the greater the likelihood it will work out the way you want. I suggest starting two or three years in advance of your intended exit date. Besides, creating a robust succession plan is simply good business – regardless of the stage of growth of your practice.

I assume you are asking about what typically goes on in the six to 12 months leading up to your target date, when you want to close in on a deal.

I’ll also start with the broadest assumption: that you do not have a prospective buyer in mind already and are willing and able to search the marketplace to find a suitable buyer. If you have a qualified candidate or are constrained by your firm regarding to whom you can sell your business, adjust these steps to take those factors into account.

1. appraise your practice

You don’t have to show this self-assessment to a prospective purchaser. However, try to put yourself in his or her shoes and ask yourself: “If I were looking to buy my practice, what would I really want to know?” It would probably be things such as:

– Your history. How did you get where you are? What struggles have you had? How did you cope? Did luck play a role?

– Your current financial condition. What are the numbers, in terms of: assets under management (AUM), client households, average account size, revenue and profitability, etc.?

– Your strengths and weaknesses. How strong is your brand? How effective is your marketing? To what extent is the business dependent on you? How efficient are your operations? What makes your business unique? What is the growth potential?

– Your objectives. Why do you want to sell? What would a prospective buyer look like? What price would you like to receive? How would you like the deal structured? What will the ideal transition look like?

2. get a professional valuation

Many ideas about how to value a financial advisory practice are based on rules of thumb, such as a percentage of AUM or X times trailing 12-month revenue. But the rule-of-thumb methodology presumes that all advisory practices are equal, which they are not. Each is a living, breathing entity with multiple nuances that affect its value.

Similarly, traditional accounting methods for valuing businesses do not apply to financial advisory practices because these methods focus on historical results. The value of any financial advisory practice is the present value of expected future net income, and it takes someone with an understanding of how advisors build clientele and generate revenue to consider both the quantitative and qualitative aspects of a practice to forecast future income accurately.

As a seller, you want to feel you receive fair compensation for your life’s work; the purchaser needs to feel he or she is paying a fair price, given the potential he or she sees in the practice. There is both an art and a science to developing a realistic value of an advisory practice, and it requires someone experienced in the advisory world to do that.

3. develop a “sell sheet”

This simple document, no more than one or two pages in length, is not designed to sell the practice; rather, it is designed to urge a meeting with prospective purchasers. It includes:

– general practice information

– your reason for selling

– a brief financial overview

– ownership breakdown

– current products and services

– compensation model

– competitive advantages

– key personnel

– future growth potential

– benefits to the buyer

4. identify prospective purchasers

Conduct research to uncover as many prospective purchasers as possible. The greater the number of potential candidates, the more likely you are to receive competitive bids, which typically raises the selling price.

Bear in mind that the ideal purchasers may not even be looking to buy another practice. They may feel their current practice is already growing fast enough and have neither the need nor the desire to make an acquisition.

That should not stop you from putting them on your list of possible successors if they meet all your other qualifications. Presented with the opportunity to add your business to their current practice, prospective purchasers may well become interested in accelerating their growth strategy.

5. find out who’s interested

Soliciting interest requires a careful hand. Let as many of your potential candidates as possible know that your practice is for sale. But you don’t want to tell the world and risk negative reaction from clients and staff or aggressive overtures from competitors. In order of preference, I recommend you consider:

– a direct approach, in person or by telephone

– an indirect approach, through a third party

– advertising (least preferred)

Then, present your “sell sheet” to qualified, interested buyers.

6. invite offers

In today’s marketplace, if you have executed well on the previous steps, you will have more than one person interested in proceeding with an offer – unless your practice is completely broken. For those candidates in whom you are interested, this is the point at which you sign mutual confidentiality agreements, exchange additional key information and have further discussions about the nature of the “fit” between your respective practices and the additional benefits, such as shared resources and economies of scale.

Inform each prospect that he or she is one of several potential purchasers with whom you are in discussions. Avoid signing any agreement that provides “a period of exclusivity” to a potential purchaser to conduct his or her due diligence. That can come later, when you have narrowed down the field to the most likely buyer.

7. complete a memorandum of understanding (mou)

By definition, an MOU is non-binding and “subject to contract.” We strongly encourage having a legal professional prepare this document, as it will form the basis of your final offer of sale and purchase. It should contain specific details of the proposed deal.

Selling your practice is serious business. It represents the culmination of your life’s work and the foundation of your legacy.

Go about it deliberately and carefully. Good luck.

George Hartman is co-founder and managing partner of Accretive Advisor Inc. and president of Market Logics Inc. in Toronto. Send questions and comments to george@marketlogics.ca.

© 2013 Investment Executive. All rights reserved.