Many successful advisors who entered the business in the 1970s are now starting to look at an exit strategy. Based upon the most recent statistics from the Million Dollar Round Table (MDRT), the average producer is 57. This means there are tremendous opportunities (and a very big need) for younger advisors to enter the business and fill the void created by retiring advisors.

Are you debating whether it is the right time to sell your business or not? One major tip-off that it’s time: when you realize you will not write a large check, borrow a large sum of money, buy a piece of equipment or expand into a new market because you don’t think you will live long enough or even feel the business will be profitable enough to see it pay off. Then, it is the ideal time to sell your business.

Once the decision to sell your business is in place, you must decide what the best option is to structure the plan. You can participate in an external sale by selling your practice to an advisor outside of your company, either at the individual or firm level. It’s also possible to sell to a relative, which allows you to transfer the value of the practice to a younger generation within the family. Finally, there’s the internal sale of your practice. As the name implies, the practice is sold to another advisor within the same firm. Finding someone you trust to take care of your clients can be a difficult process, but there are many different ways to implement a succession plan.

Identifying someone who is already fairly successful in the industry and involved in the financial community is the first step. It may be best if the successor doesn’t have an identical practice to your own. For example, if you’re a strong life insurance producer, looking for somebody who has a different but complimentary product offering, such as asset management, will bring a broader selling base and will help diversify the products the seller may not have previously offered.

Traditional hiring and training may not be the path to finding a successor, and in that case, non-traditional approaches should be considered. One way is to hire a new rep and train him for five years with the hope that he stays with you. Merging with another practice or bringing someone in as a full partner might also be alternatives to a sale. The MDRT Mentoring Program is an excellent way to find qualified advisors, in addition to your primary company or broker dealer.

The key is to find someone who’s “hungry,” which might mean he or she doesn’t have ready cash available. That also means you, as the seller, should be open to working with the new rep and taking a little more risk by not having the upfront money. However, by participating more in the joint product sales in the early years of the deal, it may generate a significantly higher income and total sale price. Splitting the joint sales may make the deal affordable for the purchaser and end up generating a higher total price for the seller.

Factors to evaluate when transitioning:

  • What are the considerations that need to be given to the person who is leaving the practice, relative to the structure of a buyout?
  • Are there going to be any continuations of contracts or fringe benefits?
  • Who will execute the new responsibilities that will be distributed among the existing staff?

When selling a practice, make the process easy to understand and analyze for the potential buyers. For example, one way to value a practice that has $100,000 a year of sellable, transferable net recurring revenue (NRR), would be to multiply NRR by a factor of 1.5 to 2.5, which is proprietary.

For example, if you pay 2.5 times revenue and then pay it over 36 months, it has the ability to work as a cash flow. This is positive for the buyer and seller. The seller can claim income as a sale of business and save self-employment taxes and overhead while potentially getting capital gains. The buyer is then able to spread 30 payments over 36 months, which reduces any problems with cash flow.

If an agent had an NRR stream of $100,000 a year, the value of that practice could be anywhere from $150,000 to $250,000. In addition, there would be a three-year transition period in which the retiring representative would be eligible to share in new commissions from sales made, no matter which advisor makes them in that practice. Then, after a three-year period, if the selling advisor wanted to maintain a contract and pay her own expenses, she could maintain licensing and receive a 50/50 commission split from sales made to prospects who are not existing clients.

Details of running a business are just as important as meeting with the client. If you are taking yourself out of the practice, the young advisor must be willing and able to make the transition as easy as possible. Splitting business should be considered and favor the older advisor over a three- to four-year period. The senior advisor must be willing to help finance the transaction and even carry the note, especially if there is less tangible revenue and more potential sales revenue. It’s critical to have an agreement that spells out everybody’s responsibilities and is flexible enough that it will never have to be referred to again.

There are many considerations to take into account when handing over the reins of a company, but you must first come to the conclusion that you are ready to leave and willing to let go of revenue as well as control. If not, it will not be a smooth transition. It is also important for the younger advisor to realize the selling advisor’s clients can be as close as family members; it’s much more than a business relationship with them. We spend our careers as advisors helping our clients transition their businesses. Finding the right person to help transition your practice may be the best thing you can leave your clients after all those years.

 

For more on exit planning, see:

Get a plan, man

From business success to succession

Facing up to an aging producer workforce