How to Prepare for Selling Your Financial Planning Practice
As a financial advisor, you've spent years building your practice, serving clients, and growing your assets under management. But as you approach retirement age, you may be considering selling your financial planning practice. Proper preparation is key to maximizing the value of your life's work and ensuring a smooth transition for your clients and staff.
According to Cerulli Associates, 37% of financial advisors are expected to retire within the next decade, collectively controlling $10.4 trillion in client assets.1 With high demand from potential buyers like RIAs, broker-dealers, banks, and private equity firms, now could be an opportune time to sell your practice at a premium valuation.
However, selling a financial advisory business is a complex process that requires careful planning and execution. In this comprehensive guide, we'll cover key strategies to prepare your practice for sale and position it for maximum value.
Valuing Your Financial Advisory Practice
The first step in selling your practice is understanding its true market value. While a common rule of thumb is to value a firm at 2-3 times its trailing 12-month revenue, this metric oversimplifies the valuation process.
"Valuations are based on projected future cash flows of your practice, and businesses command the highest purchase price just before they hit peak growth and profitability," explains LPL Financial.2 Factors like revenue mix, client demographics, operational efficiency, and growth potential all impact a practice's valuation.
To obtain an accurate valuation, consider hiring an experienced consultant or investment banker specializing in the wealth management industry. They can analyze your financials, processes, and market position to determine a fair selling price.
Alternatively, tools like Carson Group's Valuation Calculator3 can provide an initial estimate based on key performance indicators like assets under management (AUM), revenue sources, and profit margins.
Maximizing Your Practice's Value
Once you have a baseline valuation, you can take steps to increase your firm's worth before putting it on the market. Here are some strategies to consider:
1. Develop a Strategic Growth Plan
A well-documented strategic plan demonstrates your firm's growth potential to prospective buyers.4 It should outline your vision, target markets, marketing strategies, operational improvements, and financial projections.
Having a roadmap for continued expansion signals an owner's commitment to building long-term enterprise value rather than just coasting toward retirement.
2. Focus on Recurring Revenue Streams
The most valuable revenue sources are those that are consistent, predictable, and recurring.5 These include fee-based assets, trails, financial planning subscriptions, and other retainer services.
Evaluate your current revenue mix and look for opportunities to transition clients to fee-based models that generate sustainable income. This makes your earnings more attractive and stable for buyers.
3. Invest in Next-Gen Talent and Succession Planning
A robust succession plan and next-generation team provide buyers with confidence that your practice can maintain continuity of service and retain clients after you exit.
Identify and groom younger advisors to eventually take over your book of business. Develop their skills through training, mentorship, and by gradually transitioning client relationships.
4. Streamline Operations and Adopt New Technologies
Efficient, scalable operations reduce overhead costs and make your practice more profitable. Invest in customer relationship management (CRM) systems, portfolio management tools, client portals, and other modern fintech solutions.
Well-documented workflows and processes also make your firm more attractive to
buyers, as it simplifies the transition and integration into their existing operations.
5. Diversify Your Client Base
While an older clientele is expected for an advisor nearing retirement, you'll want to demonstrate your ability to attract and retain younger clients to sustain long-term growth.
Focus your marketing efforts on engaging next-gen clients and facilitating multi-generational wealth transfers within existing families. This diversification reduces buyer concerns about impending client attrition.
6. Enhance Your Brand and Value Proposition
A strong brand reputation, unique intellectual property, and clearly differentiated value proposition can further increase your firm's valuation and marketability.
Develop proprietary services, products, or methodologies that set you apart from competitors. Cultivate a robust professional network and online presence that reinforce your brand's credibility.
By implementing these strategies over 2-5 years, you can potentially increase your firm's valuation by 30-50% or more when you decide to go to market.6
Understanding the Sale Process
With your firm optimized for a sale, you'll need to navigate the complex process of marketing the opportunity, vetting buyers, negotiating deal terms, and executing the transaction. Here's a general overview:
1. Finding the Right Buyer
Your first step is identifying well-qualified buyers whose values, culture, and strategic vision align with your own. Potential options include:
- Other local RIA firms looking to expand
- National RIA consolidators and acquirers
- Broker-dealers and banks
- Private equity firms and investment banks
- Internal successors or junior partners
Proper buyer screening is crucial, as you want to ensure your clients will be treated with the same high level of service after the transition.
2. Marketing Your Firm
Once you've compiled a prospective buyer list, it's time to prepare marketing materials that highlight your firm's value proposition, financial performance, growth opportunities, and competitive advantages.
An investment banker or M&A advisor can help position your practice, initiate buyer conversations, facilitate due diligence, and negotiate deal terms on your behalf.
3. Vetting Buyers and Negotiating Deal Terms
As buyers express interest, you'll enter a mutual vetting process of sharing information, touring facilities, and discussing deal parameters like:
- Valuation and purchase price
- Asset vs. equity sale structure
- Cash vs. stock/equity compensation
- Seller financing and earn-out provisions
- Length of transition period and retention incentives
- Tax allocation and legal/compliance considerations
Experienced M&A counsel is invaluable for negotiating favorable terms that protect your interests and achieve your goals for the exit.
4. Executing the Transaction
Once you've selected a buyer and agreed to deal terms, it's time to execute the transaction. This involves:
- Final due diligence and regulatory approvals
- Drafting and reviewing definitive deal documents
- Obtaining client consents
- Publicly announcing the transaction
- Transitioning client accounts and operations
- Facilitating staff integration and retention
Comprehensive change management and client communication plans are critical for a seamless transition that preserves your firm's hard-earned reputation and client relationships.
Succession Planning Alternatives
For advisors who want to remain involved in their practice post-sale, there are alternative succession paths to explore:
1. Selling a Minority Stake
You can sell a minority equity stake to an outside investor like a private equity firm, bank, or RIA while retaining operational control and an ownership position.7 This allows you to eventually exit on your terms while immediately unlocking liquidity from your firm's equity.
2. Income Succession Planning
Rather than selling outright, you can structure a gradual equity redemption plan where you receive periodic cash payments from the firm's future earnings until your ownership stake is fully divested.8 This deferred compensation model provides retirement income while incentivizing you to grow the practice's value pre-exit.
3. Merging with a Larger Partner
By merging your practice into a larger RIA through an asset purchase, you become an employee-advisor while your clients and operations are absorbed into the acquirer's infrastructure.9 This option lets you eventually phase into retirement while still serving your clients through the transition.
The path you choose depends on your retirement timelines, financial needs, and desire to remain engaged in the business long-term.
Navigating Legal and Compliance Considerations
In addition to crafting an attractive deal, there are important legal and compliance aspects to address when selling a financial advisory practice:
Client Communications and Consent
You must properly notify clients about the pending change of ownership and obtain their consent, per SEC regulations around advisor transitions.10 Develop a clear communication plan that explains how the sale benefits clients and what they can expect.
Regulatory Filings and Approvals
Depending on your firm's registration type (SEC, state, etc.), you'll likely need to file for regulatory approval of the ownership change and assignment of client contracts.11 An experienced compliance consultant can guide you through these requirements.
Tax Implications and Deal Structuring
How you structure the sale—as an asset purchase, equity sale, etc.—will significantly impact your tax burden.12 Work closely with your legal and tax advisors to optimize the deal's tax treatment and protect your interests.
Post-Closing Obligations
Even after the sale is finalized, there may be post-closing obligations like client transition assistance, solicitation restrictions, or earn-out provisions.13 Ensure these are clearly defined in the deal's operating agreement.
By carefully navigating these legal and compliance aspects with professional guidance, you can mitigate risks and facilitate a smooth transition for all stakeholders.
Conclusion
Selling your life's work is never easy, but proper preparation can ensure you maximize value, find the ideal successor, and protect your clients' best interests.
By developing a strategic growth plan, optimizing operations, and carefully vetting buyers, you'll be well-positioned to command a premium valuation and negotiate favorable deal terms.
With the guidance of experienced M&A advisors, you can navigate the complex legal and compliance requirements while executing a seamless transition for your staff and clientele.
Most importantly, a well-planned exit sets you up for the next phase of life while leaving your life's work in capable hands to continue thriving for generations to come.
The road ahead may seem daunting, but by following these strategies, you can unlock the future value of your practice and secure the legacy you've worked so hard to build.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.
References:
1 Cerulli Associates research cited in "The Complete Guide to Selling Your Financial Advisory Business" - Carson Group
2 "Know the Right Time to Sell Your Advisory Business" - LPL Financial
https://www.lpl.com/join-lpl/why-choose-lpl/news-and-insights/when-to-sell-a-practice.html
3 Carson Group's Firm Valuation Calculator
4 "7 Ways to Maximize the Valuation of Your Financial Advisory Practice" - Beck Bode
https://beckbode.com/blog/valuing-financial-advisory-practice
5 "Selling an Advisory Practice: How to Prepare" - Momentum
https://www.momentumin.com/selling-an-advisory-practice-how-to-prepare/
6 Ibid.
7 "Strategically Selling A Financial Advisory Practice: Your Guide To A Successful Transition" - AdvisorLaw
8 "Succession Planning: Sell and Stay, the Basics" - FA Insight
https://www.fa-insight.com/succession-planning-sell-and-stay-the-basics/
9 "Buying or Selling a Financial Planning Firm? Here's What You Need to Know" - XY Planning Network
10 "5 Important Legal Steps Of An RIA Sale, Merger Or Acquisition" - Kitces.com
11 Ibid.
12 "The Tax Implications of Buying and Selling a Financial Advisory Practice" - Advisor Legacy
13 "5 Important Legal Steps Of An RIA Sale, Merger Or Acquisition" - Kitces.com
How to Prepare for Selling Your Financial Planning Practice
As a financial advisor, you've spent years building your practice, serving clients, and growing your assets under management. But as you approach retirement age, you may be considering selling your financial planning practice. Proper preparation is key to maximizing the value of your life's work and ensuring a smooth transition for your clients and staff.
According to Cerulli Associates, 37% of financial advisors are expected to retire within the next decade, collectively controlling $10.4 trillion in client assets.1 With high demand from potential buyers like RIAs, broker-dealers, banks, and private equity firms, now could be an opportune time to sell your practice at a premium valuation.
However, selling a financial advisory business is a complex process that requires careful planning and execution. In this comprehensive guide, we'll cover key strategies to prepare your practice for sale and position it for maximum value.
Valuing Your Financial Advisory Practice
The first step in selling your practice is understanding its true market value. While a common rule of thumb is to value a firm at 2-3 times its trailing 12-month revenue, this metric oversimplifies the valuation process.
"Valuations are based on projected future cash flows of your practice, and businesses command the highest purchase price just before they hit peak growth and profitability," explains LPL Financial.2 Factors like revenue mix, client demographics, operational efficiency, and growth potential all impact a practice's valuation.
To obtain an accurate valuation, consider hiring an experienced consultant or investment banker specializing in the wealth management industry. They can analyze your financials, processes, and market position to determine a fair selling price.
Alternatively, tools like Carson Group's Valuation Calculator3 can provide an initial estimate based on key performance indicators like assets under management (AUM), revenue sources, and profit margins.
Maximizing Your Practice's Value
Once you have a baseline valuation, you can take steps to increase your firm's worth before putting it on the market. Here are some strategies to consider:
1. Develop a Strategic Growth Plan
A well-documented strategic plan demonstrates your firm's growth potential to prospective buyers.4 It should outline your vision, target markets, marketing strategies, operational improvements, and financial projections.
Having a roadmap for continued expansion signals an owner's commitment to building long-term enterprise value rather than just coasting toward retirement.
2. Focus on Recurring Revenue Streams
The most valuable revenue sources are those that are consistent, predictable, and recurring.5 These include fee-based assets, trails, financial planning subscriptions, and other retainer services.
Evaluate your current revenue mix and look for opportunities to transition clients to fee-based models that generate sustainable income. This makes your earnings more attractive and stable for buyers.
3. Invest in Next-Gen Talent and Succession Planning
A robust succession plan and next-generation team provide buyers with confidence that your practice can maintain continuity of service and retain clients after you exit.
Identify and groom younger advisors to eventually take over your book of business. Develop their skills through training, mentorship, and by gradually transitioning client relationships.
4. Streamline Operations and Adopt New Technologies
Efficient, scalable operations reduce overhead costs and make your practice more profitable. Invest in customer relationship management (CRM) systems, portfolio management tools, client portals, and other modern fintech solutions.
Well-documented workflows and processes also make your firm more attractive to
buyers, as it simplifies the transition and integration into their existing operations.
5. Diversify Your Client Base
While an older clientele is expected for an advisor nearing retirement, you'll want to demonstrate your ability to attract and retain younger clients to sustain long-term growth.
Focus your marketing efforts on engaging next-gen clients and facilitating multi-generational wealth transfers within existing families. This diversification reduces buyer concerns about impending client attrition.
6. Enhance Your Brand and Value Proposition
A strong brand reputation, unique intellectual property, and clearly differentiated value proposition can further increase your firm's valuation and marketability.
Develop proprietary services, products, or methodologies that set you apart from competitors. Cultivate a robust professional network and online presence that reinforce your brand's credibility.
By implementing these strategies over 2-5 years, you can potentially increase your firm's valuation by 30-50% or more when you decide to go to market.6
Understanding the Sale Process
With your firm optimized for a sale, you'll need to navigate the complex process of marketing the opportunity, vetting buyers, negotiating deal terms, and executing the transaction. Here's a general overview:
1. Finding the Right Buyer
Your first step is identifying well-qualified buyers whose values, culture, and strategic vision align with your own. Potential options include:
- Other local RIA firms looking to expand
- National RIA consolidators and acquirers
- Broker-dealers and banks
- Private equity firms and investment banks
- Internal successors or junior partners
Proper buyer screening is crucial, as you want to ensure your clients will be treated with the same high level of service after the transition.
2. Marketing Your Firm
Once you've compiled a prospective buyer list, it's time to prepare marketing materials that highlight your firm's value proposition, financial performance, growth opportunities, and competitive advantages.
An investment banker or M&A advisor can help position your practice, initiate buyer conversations, facilitate due diligence, and negotiate deal terms on your behalf.
3. Vetting Buyers and Negotiating Deal Terms
As buyers express interest, you'll enter a mutual vetting process of sharing information, touring facilities, and discussing deal parameters like:
- Valuation and purchase price
- Asset vs. equity sale structure
- Cash vs. stock/equity compensation
- Seller financing and earn-out provisions
- Length of transition period and retention incentives
- Tax allocation and legal/compliance considerations
Experienced M&A counsel is invaluable for negotiating favorable terms that protect your interests and achieve your goals for the exit.
4. Executing the Transaction
Once you've selected a buyer and agreed to deal terms, it's time to execute the transaction. This involves:
- Final due diligence and regulatory approvals
- Drafting and reviewing definitive deal documents
- Obtaining client consents
- Publicly announcing the transaction
- Transitioning client accounts and operations
- Facilitating staff integration and retention
Comprehensive change management and client communication plans are critical for a seamless transition that preserves your firm's hard-earned reputation and client relationships.
Succession Planning Alternatives
For advisors who want to remain involved in their practice post-sale, there are alternative succession paths to explore:
1. Selling a Minority Stake
You can sell a minority equity stake to an outside investor like a private equity firm, bank, or RIA while retaining operational control and an ownership position.7 This allows you to eventually exit on your terms while immediately unlocking liquidity from your firm's equity.
2. Income Succession Planning
Rather than selling outright, you can structure a gradual equity redemption plan where you receive periodic cash payments from the firm's future earnings until your ownership stake is fully divested.8 This deferred compensation model provides retirement income while incentivizing you to grow the practice's value pre-exit.
3. Merging with a Larger Partner
By merging your practice into a larger RIA through an asset purchase, you become an employee-advisor while your clients and operations are absorbed into the acquirer's infrastructure.9 This option lets you eventually phase into retirement while still serving your clients through the transition.
The path you choose depends on your retirement timelines, financial needs, and desire to remain engaged in the business long-term.
Navigating Legal and Compliance Considerations
In addition to crafting an attractive deal, there are important legal and compliance aspects to address when selling a financial advisory practice:
Client Communications and Consent
You must properly notify clients about the pending change of ownership and obtain their consent, per SEC regulations around advisor transitions.10 Develop a clear communication plan that explains how the sale benefits clients and what they can expect.
Regulatory Filings and Approvals
Depending on your firm's registration type (SEC, state, etc.), you'll likely need to file for regulatory approval of the ownership change and assignment of client contracts.11 An experienced compliance consultant can guide you through these requirements.
Tax Implications and Deal Structuring
How you structure the sale—as an asset purchase, equity sale, etc.—will significantly impact your tax burden.12 Work closely with your legal and tax advisors to optimize the deal's tax treatment and protect your interests.
Post-Closing Obligations
Even after the sale is finalized, there may be post-closing obligations like client transition assistance, solicitation restrictions, or earn-out provisions.13 Ensure these are clearly defined in the deal's operating agreement.
By carefully navigating these legal and compliance aspects with professional guidance, you can mitigate risks and facilitate a smooth transition for all stakeholders.
Conclusion
Selling your life's work is never easy, but proper preparation can ensure you maximize value, find the ideal successor, and protect your clients' best interests.
By developing a strategic growth plan, optimizing operations, and carefully vetting buyers, you'll be well-positioned to command a premium valuation and negotiate favorable deal terms.
With the guidance of experienced M&A advisors, you can navigate the complex legal and compliance requirements while executing a seamless transition for your staff and clientele.
Most importantly, a well-planned exit sets you up for the next phase of life while leaving your life's work in capable hands to continue thriving for generations to come.
The road ahead may seem daunting, but by following these strategies, you can unlock the future value of your practice and secure the legacy you've worked so hard to build.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.
References:
1 Cerulli Associates research cited in "The Complete Guide to Selling Your Financial Advisory Business" - Carson Group
2 "Know the Right Time to Sell Your Advisory Business" - LPL Financial
https://www.lpl.com/join-lpl/why-choose-lpl/news-and-insights/when-to-sell-a-practice.html
3 Carson Group's Firm Valuation Calculator
4 "7 Ways to Maximize the Valuation of Your Financial Advisory Practice" - Beck Bode
https://beckbode.com/blog/valuing-financial-advisory-practice
5 "Selling an Advisory Practice: How to Prepare" - Momentum
https://www.momentumin.com/selling-an-advisory-practice-how-to-prepare/
6 Ibid.
7 "Strategically Selling A Financial Advisory Practice: Your Guide To A Successful Transition" - AdvisorLaw
8 "Succession Planning: Sell and Stay, the Basics" - FA Insight
https://www.fa-insight.com/succession-planning-sell-and-stay-the-basics/
9 "Buying or Selling a Financial Planning Firm? Here's What You Need to Know" - XY Planning Network
10 "5 Important Legal Steps Of An RIA Sale, Merger Or Acquisition" - Kitces.com
11 Ibid.
12 "The Tax Implications of Buying and Selling a Financial Advisory Practice" - Advisor Legacy
13 "5 Important Legal Steps Of An RIA Sale, Merger Or Acquisition" - Kitces.com
