Winning the "Practice-for-Sale" Lottery

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

A recent US survey revealed that the #1 way people expected to adequately fund their retirement was by winning a lottery! What fantasy! Not surprisingly, everyone in the financial services industry scoffs at the very idea of people thinking that dumb luck could play such an important role in their lives. Yet, when I talk to financial advisors about their own retirement plans, I am surprised to discover how many of them have fallen into the same kind of fallacious thinking. The lottery advisors expect to win, however, is not one where you pick a winning number but rather is one where you simply get to choose the highest bidder for your practice.
Over the past couple of decades, large parts of the industry have migrated from captive salesforces to independents, fostered at least in part by advisors’ desire to “own their book”. 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, which, in my opinion, there will be. However, that market will evolve over the next 10 years from its current status as a “seller’s market” to one where the buyer is calling the shots and that will dramatically change the odds of an advisor funding their own retirement in the manner they envision today.

There are at least two major forces at work 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, new advisors entering the business. Over the next ten years, many more advisors than today will be looking for some sort of 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 plan advisors will have to make — their practices won’t be worth as much as they think they will.

The second major force is really a result of the first. As buyers predominate, they will become far more discerning about the type of practice they will buy. They will dig deeper into the business to determine what made it as successful as it was and do an analysis to determine the extent to which existing revenues, 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 towards client service. Corporate structure, staffing and systems will all come under scrutiny as will the brand that has been built in the marketplace. Most importantly, 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 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 that your own retirement doesn’t materialize as you hope it will? 

The good news is that the process is one with which we are all familiar because we use it everyday with clients. Determine where you are today, develop a vision for where you want to be, analyze the gap in-between and implement a plan to close the gap. Start with the “30,000 foot view” and add detail as you proceed with the exercise. For example, 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 tell us they intend to continue working with a smaller number of clients, significantly reduce their hours or “die with their boots on”. Most purchasers of books of business also want the vendor to stay involved for some period of time to help with the transition. At some point, however, there will be a transfer of ownership or authority, even if only partially. Use that date as your “big day”.

In the first column, list the important criteria that you feel would be of interest to a prospective buyer. Put yourself in their shoes and imagine what you would want to know about any potential acquisition. 

Now complete the other columns by assessing the situation today and down the road relative to each of the areas of your practice you have enumerated. 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”. Which will appeal most to a buyer? If there is a difference in favour of the latter picture, do you have plans in place now to effect that change? If the current situation is better, what can you do to prevent the deterioration?

Questions like those form part of your gap analysis — identifying the things that need to be put in place or be improved to present your practice in its best possible condition when you offer it to the market. Whatever has been identified as essential to change then 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 that a prospective purchaser can track progress and determine the 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, at least to the same extent, once you start your retirement process. If your strength is on the technical side of planning, consider how that expertise can be replaced over time. If networking and marketing is 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?

Be thoughtful about this exercise. Start with a high-level view, narrow it to specifics and develop a plan. The pay-off will be a winning ticket in the practice-for-sale lottery.

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The Covenant Group is referred to by many as the place entrepreneurs go to become Business Builders. They are considered to be thought leaders and have authored the best-selling books, The 8 Best Practices of High- Performing Salespeople, The Entrepreneurial Journey, and The Business Builder.