Advisers Could Get Better Returns On Their Investment
Practice Management & Strategic Issues

Advisers Could Get Better Returns On Their Investment

June 29, 2020

by Tony Vidler  CFP logo   CLU logo  ChFC logo

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It is a little ironic that many professionals in the business of advising people how to get better returns do not do what they should to get a better return on one of their own biggest investments – their business.

 

Many advisers think a successful personal retirement is simply a matter of selling their business to another adviser, and that it is a straightforward matter.  I suppose it is if you are not chasing premium pricing…or not seeking the best return you could on your investment.

 

In years gone by selling an adviser business was a relatively simple matter of working out the recurring revenue that was contracted to come in (e.g. contractual rights to renewals on policies in force; renewable trail on AUM; etc), and then just applying a multiple to those contractual rights.  That still happens of course…but for good professional advisory firms it is increasingly looking like poor value if they are trying to sell.

 

Why?  Because that approach to valuing a professional advisory practice is just an asset sale, not a business sale.

 

Valuing an income stream is a pretty straightforward proposition generally, and essentially involves placing a discounted value on a predictable cashflow.  Different assumptions throw up different valuations of course, but that is just playing maths with the variables to form an opinion about probable value of future cashflows.

 

But when you are selling a practice….a real business that has assets and ability and potential well beyond just a known (historical) cashflow, you are buying opportunity.  And opportunity should attract “premium” pricing – not “discounted” pricing.

 

If you are an adviser thinking that your business is potentially your biggest investment and you want premium pricing for it, then you need to think about what potential business buyers will be interested in placing premiums upon.  That is just as important as the actual contracted cashflows, as it is not uncommon for “opportunity” to double the value (or more) of a practice.  THAT is the value of selling a business rather than an income stream, or asset of the business.

 

Here is a short list of big things that a buyer will want, and should be willing to place a premium upon:

  •  Higher than usual client retention rates (a quality book of clients)
  •  Cultural fit (e.g. advice standards and type; fees & remuneration systems; philosophy)
  •  Systems compatibility (similar IT platforms; internal documentation processes; data & record-keeping)
  •  Key People retention (staff advisers; para-planners; administrators; specialists)
  •  HR policies (types of employment arrangements & contracts; contingent liabilities or incentivised team?)
  •  Marketing systems (proven processes for ensuring ongoing new business or new client acquisition?)
  •  Professional Development systems (established culture and methods of internal skills growth)
  •  Strategic Alliances (networking; business suppliers; product providers)
  •  Branding & Market position (reputation; market penetration & position)

 

Time and financing are value factors too.  Do not underestimate either when it comes to the manner in which a transaction is put together.

 

Then there are the other non-quantifiable factors that can potentially enhance sale value simply because the create higher confidence or convenience, and might include:

  •  Open & honest communication
  •  Fairness in negotiation, and understanding of what the other party really wants or needs
  •  Clarity and confidence about what the seller will be doing post-sale (able to assist or a potential competitor?)
  •  Seller flexibility (how the outgoing owner will assist for a successful transition)

 

The 3 strategies for successfully getting a better return on your own biggest investment as a financial advice practice owner, are:

1. Building a business which is sustainable without you (that a new owner can walk into and essentially keep running)

2. Creating a business which has growth potential for a new owner, rather than just being a dying contractual income stream, and being able to identify those opportunities easily.

3. The attitude and structure of the deal.

 

Get those components right and there is every chance that your practice will be worth 2 or more times the average “market multiple”.

 

You may also find this post useful:
The “service” bit in your service business might just be the best ROI
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