Disclaimer – Opinions expressed are solely my own and do not express the views or opinions of my employer.

Too many financial planners and other personal finance advisers fail to get the best value on businesses that they may have spent decades building up. Here are some thoughts on how to avoid joining them.

Timing and your approach to valuation are the most common issues in the exit planning process for financial advisory businesses. As an independent financial advisor your “book”, practice or business is the largest and most valuable asset you own.

According to David Grau of FP Transitions, approximately 70% of independent financial advisors are defined by the value of their client relationships to the extent that they are simply known as “books”. They are most likely to sell not only at the lowest price but also the worst commercial terms such as tax structure. Currently, only 1 in 10 advisors successfully sell externally, leaving an incredible 8 out of 10 advisors ultimately choosing some form of attrition where the advisors book of business dies but not before throwing off an extra 5 to 10 years of gradual declining cash flow to the owner.

These outcomes are largely the result of a late planning process. There are better choices than attrition! Why let what you have spent so many years building simply fade away because you do not think you have a better option?

Chose the Right Valuation Methodology for Your Situation


Valuations are performed for a variety of reasons: mergers, acquisitions, estate and gift purposes, for marital, partnership or corporate dissolutions, a sale of a minority interest in their corporation or LLC to a child or group of employees. Different valuation approaches and methodologies are needed, according to your situation. For example, a particular court jurisdiction under a fair market value standard may not be satisfied with market approaches but instead prefers emphasis on income approaches. In a M&A setting, investment value would factor in synergies into an income approach whereas a fair market value standard would not. Thus, situation is critical and helps dictate what approaches and methodologies are needed. In addition, with the range of revenue streams and structure components within this complicated, evolving industry, there is no single unifying valuation methodology. Talking to a qualified valuation analyst and obtaining a formal valuation will help you learn from the process and make better informed decisions.


Choose the Right Valuation Methodology for Your Situation


The majority of independent advisors have an idea of what their organization is worth. However, there will be a time for your practice when a value indication off by $100,000 will not pass muster. Thus, when the subject of valuation comes up, the goal is normally to get to the right answer quickly, and inexpensively while minimizing hassle. Therefore, it is imperative to have a formal, annual valuation to assess and monitor equity value.

Planning and timing are critical

An independent financial advisors primary concern should be catching any decline in that equity value. It is better to sell at less than max value than face a greater loss through attrition. Based on past valuations performed, once an advisor is north of 60 years old the net new client acquisition rate stabilizes and then annually gradually declines. Therefore, advisors would be wise to sell on the way up as opposed to the alternative. To maximize the chance of selling at a high value, you will want to start the planning process 3-5 years before you’re ready to sell. In these interim years, advisors typically monitor equity value annually to make sure the business is not in attrition mode and leaking value. During this time, we will help educate you on what drives and detracts from value while there is still time to implement changes and improvements.

If your business is likely to be affected by these issues, please feel free to contact me.