Farmers understand the importance of timing their harvest for the most profit. They want the maximum amount of the crop at the highest price with a ready buyer. If they wait too long, they may lose crop yield to weather, the price may decline as the market fills with other farmers’ harvests, or the buyers may no longer need what the farmer is selling.
Unfortunately, too many advisors wait too long to harvest the fruits of their labor through selling their practice. Some aren’t emotionally ready to face the idea of selling. Others may think if they wait, the practice will automatically be worth more in the future. In the meantime, their energy declines, their clients die, the practice shrinks, and potential buyers look elsewhere. Eventually, often due to serious health concerns, these advisors are forced to sell – usually for much less than the practice was worth in its prime.
The optimal time to sell your practice can’t be based on a specific revenue or asset amount or a specific age, whether yours or the practice’s. Like the farmer, that optimal timing relies on your careful review of the prevailing conditions – an ongoing process that starts well before you decide to harvest. The following questions can help you determine the optimal time to sell your business.
A) Personal Considerations
- Are you still physically and mentally able to do the job?
- Does your spouse or other family member have health conditions that may reduce your own energy and time for the business?
- Do you still have the passion and motivation to grow the business?
- Do you still have fun doing your job?
- Does your spouse wish you spent less time working so the two of you could spend more time traveling, spending time with family or otherwise enjoying retirement?
- Have you made enough money to live more than comfortably the rest of your life?
B) Business Considerations
- What portion of your client base is reaching the end of their expected life span?
- What portion of your clients are moving from accumulating for retirement to the distribution phase?
- Do you have a ready internal buyer, such as a family member, partner or key employee?
- Does your staff clearly understand your retirement plans, including when you plan to exit the business and who will take over?
Based on your answers to the questions above, possible courses of action might include the following scenarios:
Scenario 1: It’s Time to Retire
Whether it’s for health reasons, your spouse wanting more freedom to travel or the spark is gone, you’ve decided it’s time to sell your business and move on. If you have successor waiting in the wings, get together and create a plan, with specific dates for changes and your full departure from the business. Even if your succession is your child, and he or she “knows” they will be taking over the business, do both of you the favor of putting your plans in writing with firm dates.
If you don’t have a successor, you will need to find one. Do you have a key employee who is interested and able to take over? Do you have a relationship with another local advisor who shares your philosophy? You may even decide to work with a third-party that specializes in practice transactions.
Scenario 2: It’s Not Time to Retire, but Your Practice Needs a Boost
Just like the farmer, if your crop isn’t growing, it’s dying. There’s no such thing as simply maintaining your practice until you’re ready or forced to retire. Potential successors will tire of waiting and look elsewhere to advance their careers or business. Employees who notice declines in the number of client meetings, new accounts being opened and revenues may feel uneasy about their job security.
If you’ve decided to stay in the business, commit to growing it. Engage in a coaching program to regain your energy and focus. If you’re unwilling to implement what you learn, revisit the questions above.
Scenario 3: You’d Like to Retire, but the Current Value of Your Practice Is Too Low
Set your retirement date and focus on what you can do to increase your practice valuation. This could include transitioning more of your revenue from commission to fees, gathering more assets from existing clients and making stronger efforts to connect with your current clients’ heirs. Look for coaching programs specifically for maximizing the value of your practice, and commit to implementing what you learn.
Scenario 4: It’s Not Time to Retire, but a Potential Buyer Has Appeared
Depending on your location, interested buyers may be few and far between. Can you afford to pass up this opportunity and risk the chance that when you are ready to sell – or forced by health or other concerns to sell – this buyer will still be interested? A continuity agreement can be a good “test” of whether you and the potential buyer are a good fit. A continuity agreement lets the potential buyer step in and operate your business if you become incapacitated, with specific conditions for the buyer to purchase the practice if you are unable to return to work.
Good planning and attention to prevailing conditions help farmers earn the most money from their hard work. The same applies to your practice. By facing your own emotional issues about retiring and selling your own practice, taking steps to continue its growth and keeping an eye out for potential buyers, you can harvest the most from your own hard work.