Advisors are smart about many financial matters, but when it comes to selling their own firm, many are surprised about how much more there is to know. There was sage advice at the Investment Advisor/Moss Adams Summit in Las Vegas on December 1, from long-time Investment Advisor columnist (and former editor-in-chief) Bob Clark, who counts among his own clients FP Transitions, a financial practice consulting firm.

FP Transitions’ Web site (www.fptransitions.com) is where firms looking to buy or sell a practice can list themselves. It is a “vibrant, robust marketplace,” says Clark, reporting that FP Transitions typically has about 200 firms for sale and about 4,000 or 5,000 buyers on its Web site. He says FP does about 100 deals in a year, taking a fee of 7% split between the buyer and seller. Deals usually close in about three months. The firm has created an “independent marketplace” for advisors, Clark says.

Deals are not equal, however, and the deal that appears at first blush to be the highest bid for a firm might not pan out that way; it is important to look below the surface. There are a few different types of buyers: Institutional buyers include strategic buyers like banks and insurance companies; and consolidators, which roll up smaller firms under their umbrella, Clark explains. Advisors who want to quickly build assets by acquiring other advisors are another type of buyer. In the case of one advisor buying another, the profitability of the target firm may not matter because the buyer presumably knows how to run a firm profitably; here the primary targets are clients and assets. But institutional buyers often have their own agenda, and their own investment bankers who may show up with numbers that may at first look great–much more than what another advisor is willing to pay–and this is where some sellers can wind up in hot water.

“Size matters,” says Clark, referring to the revenues of a seller’s firm, and also to the size of the buyer–and so does who is buying. He cautions against leaping to sell to the highest bidder: “Why would a practice be worth more to a bank than to an advisor just like you, down the street?” Correct valuation matters, too. Smaller firms with less than $2 million or $3 million in revenues are generally sold on the basis of gross revenues, but where the revenue comes from is very important: Are a practice’s revenues derived from commissions or fees? Commission revenue is considered much less valuable than fee revenue because fee revenue is considered recurring, while commission revenue is not. Fee revenue is considered about twice as valuable than commission revenue, says Clark, referring to the FP data. What to do? Convert your clients to fees before selling your practice, he suggests.