Tips on Selling Your Financial Services Business

You’ve spent your career building your advisory practice from the ground up. You have a book full of loyal, regular clients and the business is still growing. You’re starting to think about retiring from the business and either selling it or passing it on to a family member. There’s only one problem: You are inextricably entwined in the business. Clients want to see you, not someone new.

Like other personal services businesses, such as law firms and accounting practices, your clients trust you and have a rapport with you; they like the way you treat them and handle their business. While that can make for lifetime customers, it can also make it difficult to sell your business to someone else. There are no guarantees that your clients will stay with the new owner and, therefore, the value of your business to a potential buyer might be less than it would be for other companies.

Planning the sale or transition over time can help ease your clients into it, and can net you a higher sale price for your practice.

Assigning a Value to Your Business

Valuing any business is a tricky endeavor, but even more so with a service business where the main asset is the client list. There is no magic valuation that you can calculate, but you can come up with a range of values that your sale price should fall into.

The bottom end of the range (or the floor) should be the liquidation value of any hard assets. You may have computers, desks, chairs, and other office furniture and equipment. You may even own a car in the business. The amount of money you could reasonably make from the sale of these used assets, minus paying out any loans connected with them, represents liquidation value. Your business cannot be worth less than that.

In order to calculate the high end of the range, you must analyze your annual revenues. This tells you how much a new owner could bring in every year if all of your existing clients stayed with the business after the sale. A common valuation standard used is one year’s revenues. For example, if your average annual revenue before expenses was $210,000, that would be the top end of what a new owner would pay for it.

Once you have the floor and the ceiling, your practice is worth something in between. Conduct some research to see what other similar practices are being sold for in your geographical area. Talk to other advisors about what they pay for blocks of business to get a sense of what the going value is in your community.

If you have a complex and large advisory practice, however, you should consider hiring a business valuator or experienced accountant to help you value your business. If you sell your practice for less than it’s worth, it can have significant detrimental consequences on your retirement income.

Completing the Sale

In order to keep the largest number of clients in the practice when you sell it, you will have to manage the transition carefully. There should be overlap between you and the new owner servicing the clients. For large clients, it may be helpful to have both of you meet with them to discuss the transition and their portfolios. This may give them more confidence that the new advisor will look after them the same way you did.

Let all of your clients know about the impending change and what they should expect from it. Most importantly, be available to the new owner for a period of time after the sale to answer questions and help with issues. The smoother the transition for clients is, the more likely they are to stay.

The Bottom Line

Retiring or moving on from your advisory practice can be complex, but you can ensure that you get the most value out of it by planning ahead and managing your client relationships. Know the value of your business and make sure you harvest it.