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What to Do Before You Sell Your Practice

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Preparing to sell your practice is a bit like preparing for retirement: The earlier you start, the better off you’ll be — and exponentially, so.

“Advisors should start to prepare their firms for sale the day they set up shop,” according to Michael Wunderli, a managing director of Echelon Partners, an investment banking firm in Manhattan Beach, California.

“Advisors must begin with a vision of the kind of firm that they intend to build,” Wunderli says.

This means doing the long-term planning and creating the kind of firm culture that will enable them to build a truly prized, valued organization. “This process instills discipline, accountability and stewardship,” he adds.

Other experts, like Advice Dynamics Partners CEO and founder David Selig, agree that it’s never too early to plan for the future sale of an advisory firm.

The earlier a firm starts to plan for its eventual sale, the more options its owners will have, says Selig, who leads the Mill Valley, California-based M&A consultancy. It’s especially important to start early if you are thinking that you’d like to set up an internal succession program.

Many advisors prefer internal succession programs. This process assures them that their firm will maintain its independence and will continue into the next generation without them. But if you start too late, it’s nearly impossible to execute this program.

Late Start?

Selig says he gets calls from advisors in their 60s, who don’t have enough time to find the right advisors to become successors for their practices.

Finding the right advisors to acquire and run an advisory firm isn’t easy. Not all employee advisors are capable of running a firm, and many don’t want to be owners.

Selig typically proposes other options to these late-to-the-party owners — such as an outright sale of their firm or a search for an outside investor to take an ownership stake and provide a succession plan.

Maintaining  momentum in the sales process is crucial for a successful sale, according to Wunderli. “Anything that slows or disrupts momentum can hurt firm valuation and even the chances of the deal going through,” he says.

The excitement of striking a deal can wear thin if too much time elapses. He’s seen prospective buyers drop out when firms took too long to produce due diligence documents.

“The sales process is [like] a 6- to 12-month interview,” Wunderli explains. Sellers benefit greatly from having  good news to share on their assets under management, profitability and growth rates.

If possible, he recommends, firms should put themselves on the market after they’ve had two good years and still expect  strong results in the coming year.

Not all the firm’s positives should be shared with prospective buyers upfront, Wunderli cautions. Too often buyers uncover only negatives during the due diligence process.

It’s a huge advantage to have some unexpected good news to tout along the way to keep buyers interested and motivated, he says.

Designating a deal team that has all the updated firm documentation and who can answer questions about the firm’s finances, operations and compliance can help to propel the sales process forward, too.

Along with copies of all pertinent financial documents, the deal team needs to have copies of client contracts and custodial agreements, too, for instance.

More Issues

There are a number of steps that owners can take well in advance of putting their firms on the market to make them more attractive to potential buyers.

These may involve fundamental shifts in a firm’s culture or methods of doing business. In other words, getting a firm ready for sale could be a multi-year process in some cases.

For example, buyers find practices with recurring revenue streams far more attractive than commission-based businesses. Multi-generational client relationships are similarly prized.

One common pitfall is that many sellers overemphasize their unique role in driving their firms’ success. Since they’ll eventually be stepping out, this undercuts the value of their firms.

Here are three steps that independent firms can take prior to shopping their firms to help them maximize their value, which Selig recommends:

1.Professionalize the business.

This means focusing on core competencies and transitioning the firms from mere practices to enterprises. For example, advisors may want to focus on their client relationships and portfolio management and outsource their human resource, operations and technology work.

Firms that have sufficient AUM to warrant hiring professional managers, like a president or COO with no direct client responsibilities, grow faster and become worth more over time.

2.Institutionalize client relationships

Optimally, clients should be dealing with multiple staff at the firm, not siloed advisor cowboys who can always ride out of town.

3.Incentivize a culture of growth

All firm advisors and staff must understand that they are expected to help grow assets, revenues and the number of clients. Compensation programs must encourage and reward these behaviors.

Beginning with the end in mind is the second habit of author Stephen Covey’s “7 Habits of Highly Effective People.” Advisors need to remain focused on building a business that will be of maximum value to sell — from the first day they open their practices and every day thereafter.

They also should operate with a clear vision in mind and develop an action plan to turn their vision into reality.


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