Time to Think About Selling?

Editorial Director

If you have a "for sale" sign hanging outside your office, you are in good company these days. With many independent advisors nearing the retirement age, a growing number of practices owned by baby boomers and those only a little older are going on the block. "A bulge of 55- to 65-year-olds is going through our business," says Tom Sinyard, a vice-president at SunAmerica Securities in Phoenix.

This inevitable demographic bulge is presenting a tidy opportunity for those who broker sales and purchases of planning practices. But it also should be forcing you to ask some hard questions about your business. Advisorbenchmarking.com, a Web site run by Rydex Global Advisors that collects information on the planning industry, estimates that just 30% of advisors have a written succession plan. Other surveys say the number is even smaller. Advisorbenchmarking also says that only 40% of advisors even have a written business plan. Without such documents, do you really know what your practice is worth? Do you know if now might be a good time to cash out? Or should you stick it out and even expand by purchasing someone else's practice?

I can't write a business or succession plan for you. But I can give you some idea of where the market for planning practices is right now. To do that, I turned to Sinyard, who is responsible for Myivalue.com, a SunAmerica Financial Network Web site that matches advisory practice buyers and sellers, and David Goad, CEO of FPtransitions (www.fptransitions.com), a Portland (Oregon)-based independent firm that brings together RIAs, CPAs, insurance practitioners and broker-dealers.

Goad says that 63% of the sales he has handled were of practices run by those aged 51 to 65. By contrast, a quarter of his purchasers are between 41 and 45, and nearly as many are between 36 and 40. And like many current financial planners, Goad's buyers tend to think long-term. Rather than plunk down the full purchase price in cash, many will make a 20% deposit and opt for an "earn-out" arrangement that spreads the balance out over time.

Both Goad and Sinyard acknowledge that the end of the bull market has caused practice valuations to fall, but not by that much. That reflects the continued strong demand for financial planners. "Demand has skyrocketed," says Goad. "We have 20 buyers for every seller."

Goad figures that an average fee-only practice, traditionally the most expensive, has been going for 1.94 times annual gross revenue, down from 2.10 at the end of 2000. Practices based on both fees and commissions have sold for 1.70 times revenue, down from 1.72; and commission-only practices have gone for 1.05 times revenue, down from 1.10. In other words, sale prices for fee-only practices are down 7.6%, commission-and-fee prices are down 1.1%, and commission-only sale prices are off 4.5%.

Goad chalks up the smaller percentage fall in the valuations of commission-based practices to rising interest among fee-only and fee-based advisors who have successfully converted commission-based practices and continue to see this as a cheap way to expand.

If this prompts you to start thinking about retirement, succession, or selling, so much the better. "Planners have these conversations with dentists and CPAs, yet they don't have them among themselves," says Sinyard. "Maybe it's denial or procrastination, or maybe they're just not thinking of themselves as being mortal. It's a very emotional decision." Nonetheless, planning your own future--including valuing your practice and contemplating buying or selling--is something you must explore. After all, this is what you do for your clients. You owe yourself the same treatment.

A closing footnote: Have a happy holiday and a healthy, prosperous, and peaceful 2002. And remember to give your family members lots of hugs.

Reprints Discuss this story
This is where the comments go.