5 Reasons to Consider Selling Your Practice Now

By Anthony Whitbeck, CFP, CLU
CEO of Key Management Group

After years of building a successful practice, advisors face both an emotional and financial decision regarding the sale of their practice. Emotionally, advisors have spent years building deep relationships with their clients, many who have become friends, and some who are like family. The thought of transferring these close relationships to someone else becomes very personal.

Financially, they also have a big decision to make. The question: Do I sell now or do I stick around for a few more years and sell my practice? There are many things that go into making a good decision, but a number of indicators suggest that it might be better to sell now. If you consider yourself to be within five years of retirement or you’re at the point where you’d like to slow down and enjoy more personal time, here are some reasons why you might want to consider selling sooner than later.

Practice values are at all-time highs.

The Dow Jones Industrials is above 25,500, the S&P 500 broke 2,700, and the Nasdaq has reached 7,000 (a level not seen since 2000 and the dot-com bubble). While no one knows what’s ahead for the markets, we do know that it is producing record levels of recurring revenue through trail income and asset management fees.

While there are different methods used to calculate the value a financial advisory practice, two common practices include: multiples of revenue and discounted cash flow. During 2017, the average multiple used to calculate the practice value was 2.55 times recurring revenue plus 1.0 times non-recurring revenue. I underline average, because the actual multiples vary greatly between individual practices. These averages are the highest we’ve ever seen. So what does this mean? High recurring revenues X high multiples = high practice values.

Demand far exceeds supply.

There are numerous published statistics regarding the ratio of buyers to sellers. Most conclude the ratio is approximately 50 buyers for each seller. This large disparity is one more reason that practices are selling for top dollar. Given the high demand, buyers have been known to pay significantly more than the actual calculated value.

But don’t expect the current supply and demand to continue much longer. Similar to the general population, the advisor base is aging. The average age of the advisor population is somewhere between 55 and 60 years of age. Many advisors say they are within “5 years” of retirement. As an industry, few firms are focused on recruiting and training the next generation advisor. Why? It’s hard and expensive. Gone are the days of hiring college graduates in volume and hope some will make it.

Herein lies the problem. More and more advisors are going to retire and the industry in not replacing them with the next generation. What does this mean? More supply and less demand, which generally means lower prices.

Cost of capital is at historic lows.

Until recently, most acquisitions were seller financed. Typically the buyer gave the seller a down payment (20-30% of the purchase price), with the remainder financed by the seller through a note, an earn-out, or both. Things have changed significantly in the past few years. A number of financial organizations, like Live Oak Bank and PPC Loan, have gotten into the market to finance practice acquisitions. Some firms will finance up to 100% of the purchase price and offer attractive terms of Prime plus 2-3% paid over ten years.

The current interest rate environment makes this a very attractive method for financing an acquisition and it’s allowing for top dollar offers. We are currently in a very low interest environment, which will not last forever. Once things change, the cost of acquisition will rise and the price buyers are willing to pay will go down.

Compliance and technology have become increasingly complex.

The compliance requirements for advisors have become more intense and complex. Some advisors (generally the older ones) are simply tired trying to keep up with the changes. The same holds true for technology. The most efficient practices operate virtually, paperless, present content on iPads, and conduct client meetings online. Clients have come to expect this from their advisor.

For change resistant, non-tech savvy advisors, today’s environment is both scary and uncomfortable. They are simply left with two options: adapt and embrace compliance and technology or plan their transition to the next generation. Many have chosen the latter.

Clients are getting old.

Just like our industry, clients are aging as well. The average client age is a few years older than the average advisor age. Many (existing) clients have already retired or they will be retiring soon. Why does this matter? Because traditionally, practices have been growing (assets under management) due to the retiring baby boomer market and their retirement plan rollovers. This trend is clearly changing. Many advisors are finding it difficult to maintain a positive net flow in their practice. Advisors simply have more money leaving for retirement income distributions than they have coming in from new client acquisition.

It is not surprising that client acquisition efforts decline as an advisor reaches the later years of their career. After all, they’ve earned the right to coast on their previous efforts and enjoy the recurring revenue they have created.

The problem? Buyers don’t want to buy a deteriorating practice.

Conclusion.

One could argue that there has never been a better time for an advisor to sell their practice. Unfortunately, most advisors are addicted to the cash flow from their practice. They perform a simple math equation in their head and conclude “I can just work three more years, collect my current income and then sell my practice for the same amount.” Unfortunately, most don’t realize they may be running their practice into the ground.

If you are within “5 years” of retirement, you should consider the information above and determine if now might be the best time to sell your practice.