The de­ci­sion to make your exit now or wait five years isn’t bi­nary. Many vari­ables could af­fect the out­come of your choice

Investment Executive - - FRONT PAGE - GE­ORGE HART­MAN

Many fac­tors af­fect when you should sell your book of busi­ness.

“Coach’s Fo­rum” is a place in which you can ask your ques­tions, tell your sto­ries or give your opin­ions on any as­pect of prac­tice man­age­ment. For each col­umn, Ge­orge se­lects the most in­ter­est­ing and rel­e­vant com­ments from read­ers and of­fers his ad­vice. Our ob­jec­tive is to build a com­mu­nity of peo­ple with a com­mon in­ter­est in mak­ing their fi­nan­cial ad­vi­sory prac­tices as ef­fec­tive as pos­si­ble. AD­VI­SOR SAYS: I HAVE JUST RE­TURNED from a fab­u­lous month-long va­ca­tion at my cot­tage, which is more time than I have taken off from my prac­tice in the past 10 years. I did check in with the of­fice a few times in the first two weeks, but soon re­al­ized that the busi­ness could get along quite well with­out me, so I turned the last two weeks into a “Call me if you need me” ex­er­cise. I never got a call.

I also learned that I am pretty good at re­lax­ing, pur­su­ing ac­tiv­i­ties when the mood hits me and en­joy­ing time with fam­ily and friends. I be­gan to think this might be a good way to live in re­tire­ment — prompted by the fact that I cel­e­brated my 65th birthday dur­ing my time away.

I have al­ways said I would work un­til at least age 70. How­ever, now I am be­gin­ning to won­der if re­tir­ing sooner would be bet­ter than later. Any thoughts? coach says: i wrote a col­umn on this topic about a year and a half ago (see the April 2017 is­sue of In­vest­ment Ex­ec­u­tive) in re­sponse to a sim­i­lar ques­tion from an ad­vi­sor who re­ceived an un­so­licited of­fer to buy his prac­tice be­fore he in­tended to sell it. But here are some sober­ing ob­ser­va­tions that I can add from my real-life ex­pe­ri­ence.

Al­most half of ad­vi­sors’ suc­ces­sion plans do not suc­ceed as ex­pected. They fail be­cause one of the par­ties:

wants out of the deal be­cause his or her ex­pec­ta­tions aren’t be­ing met

suf­fers an un­ex­pected ill­ness or dies pre­ma­turely

is af­fected by a per­sonal is­sue, such as di­vorce, ill­ness or death of a par­ent or spouse.

Could any of these con­tin­gen­cies af­fect you? Some of these events can­not be pre­dicted, and the like­li­hood of oth­ers is known only to you. The truth is that the de­ci­sion to re­tire now or wait five years isn’t bi­nary. Many vari­ables can af­fect the out­come of your choice.

This brings me to Jeremy, a 30-year in­vest­ment in­dus­try vet­eran who en­gaged our firm to as­sist with his long-term suc­ces­sion strat­egy. Co­in­ci­dently, Jeremy had the same five-year time hori­zon as you do, al­though his tar­get date for ex­it­ing was age 65.

As we al­ways do, we spent a lot of time help­ing Jeremy de­ter­mine both his fi­nan­cial and emo­tional readi­ness to hand over his busi­ness to some­one else within the next five years. Emo­tion­ally, he was pretty much OK with his de­ci­sion. He wasn’t anx­ious to walk out the door just yet, but he could see his en­thu­si­asm for re­tire­ment grow­ing over the next few years.

Fi­nan­cially, Jeremy was sur­prised by the val­u­a­tion of his prac­tice we com­pleted. He had un­der­es­ti­mated the cur­rent mar­ket value of his busi­ness. In fact, as a re­sult, he con­cluded that even if he chose to exit the in­dus­try to­day, he could en­joy a com­fort­able life­style wor­thy of his 25 years of work.

That re­al­iza­tion l ed Jeremy to ask, “Given that I don’t need to spend the next five years build­ing my prac­tice value any higher, should I con­sider selling now?”

We talked more about his emo­tional de­sire to con­tinue work­ing for sev­eral years and the fact that we hadn’t even be­gun the work re­quired for a suc­cess­ful tran­si­tion, in­clud­ing choos­ing the right suc­ces­sor. So, Jeremy prob­a­bly was on the hook for at least an­other year, re­gard­less.

Then, we turned our at­ten­tion to some of the very prac­ti­cal con­sid­er­a­tions that could favour selling sooner rather than later.

A lmost half of ad­vi­sors’ suc­ces­sion plans do not suc­ceed as ex­pected


Many ad­vi­sors be­gin to work fewer hours (as you have) as they ap­proach their tran­si­tion date.

Fewer hours gen­er­ally equates to less busi­ness de­vel­op­ment to re­place as­sets that clients are draw­ing down to fund their own re­tire­ment or trans­fer to oth­ers. At the same time, your busi­ness ex­penses con­tinue to rise.

The com­bi­na­tion of fewer new busi­ness op­por­tu­ni­ties, de­clin­ing rev­enue and mar­gin squeeze leads to lower prac­tice val­u­a­tions. In other words, the longer Jeremy waits to sell, the greater the po­ten­tial risk that his prac­tice will de­cline in value rather than ap­pre­ci­ate.


Jeremy un­der­es­ti­mated the mar­ket value of his busi­ness pri­mar­ily be­cause he was ap­ply­ing var­i­ous “rules of thumb” for val­u­a­tion. To­day’s buy­ers are more dis­cern­ing and con­sider both quan­ti­ta­tive and qual­i­ta­tive fac­tors when they look for a prac­tice to pur­chase. They will pay pre­mium prices for above-av­er­age books of busi­ness.

In Jeremy’s case, much of our ini­tial work in­volved con­vert­ing his prac­tice from com­mis­sion rev­enue to a fee-based model. By the time we were hav­ing this dis­cus­sion, Jeremy’s rev­enue was 85% fee-based. Whether the busi­ness was val­ued on a mul­ti­ple of re­cur­ring rev­enue or dis­counted cash flow, from a “qual­i­ta­tive”

per­spec­tive, it war­ranted a pre­mium val­u­a­tion.


There are var­i­ous es­ti­mates of the cur­rent ra­tio of buy­ers of fi­nan­cial ad­vi­sory books of busi­ness to sellers, with some peg­ging it at 50:1. I can add from my per­sonal ex­pe­ri­ence that I re­ceive many times more in­quiries about po­ten­tial deals from buy­ers than from sellers. That’s partly be­cause ad­vi­sors who want to sell usu­ally don’t ad­ver­tise their in­ten­tions, as most trans­ac­tions take place in­ter­nally within their dealer firm.

Re­gard­less, the com­pe­ti­tion for good prac­tices has pushed prices up — for now. As the ad­vi­sor pop­u­la­tion con­tin­ues to age, more and more prac­tices will be­come avail­able and, in my opin­ion, mul­ti­ples will be­gin to de­cline.


One de­ter­mi­nant of the fi­nal price at which a prac­tice changes hands is the terms of sale. In the past, most trans­ac­tions were fi­nanced by the seller, who re­ceived a down pay­ment, with the bal­ance paid over, say, three to five years, sup­ported by a prom­is­sory note bear­ing a rea­son­able rate of in­ter­est.

From the buyer’s per­spec­tive, the more favourable the terms, the more he or she is will­ing to pay. For the seller, an all- or mostly cash deal may be an in­cen­tive to ac­cept a lower price.

To­day, buy­ers have ac­cess to a widen­ing choice of fi­nanc­ing op­tions, rang­ing from lend­ing in­sti­tu­tions to in­ter­nal dealer-spon­sored pro­grams that al­low buy­ers to bor­row larger amounts of cash — at his­tor­i­cally low in­ter­est rates — to fund the deal. Jeremy’s firm had such an ar­range­ment and he ad­mit­ted he would ac­cept a lower price to have all his money guar­an­teed up front.


Clients in­creas­ingly ex­pect pa­per­less ac­cess to their data, on­line col­lab­o­ra­tion with their ad­vi­sors for plan­ning, video meet­ings and in­stant com­mu­ni­ca­tion. Jeremy did not find adapt­ing to new tech­nol­ogy easy or en­joy­able. He con­tin­ued to send PDFs via email to clients, use Mi­crosoft Out­look as his client re­la­tion­ship man­age­ment sys­tem and use Ex­cel spread­sheets for pre­sen­ta­tions.

Jeremy re­al­ized that his re­luc­tance to keep up with tech­nol­ogy would pro­gres­sively

di­min­ish the value of his busi­ness.

The longer Jeremy waits to sell, the greater the risk his prac­tice will de­cline in value


Would you pay more for a prac­tice with an av­er­age client age of 60, which means money is con­tin­u­ing to come in, or a prac­tice with an av­er­age age of 70, which means money is flow­ing out? Most of Jeremy’s clients were in the 60- to 65-yearold age range. If he waited five years to sell, the av­er­age age would be 65 to 70 and, all other things be­ing equal, his prac­tice value would prob­a­bly de­cline as more and more clients switched from ac­cu­mu­la­tion to the distri­bu­tion of their as­sets.

When we added up all the fac­tors, Jeremy con­cluded that from a fi­nan­cial per­spec­tive, the tim­ing prob­a­bly was right for him to sell his prac­tice. That did not, how­ever, ad­dress his emo­tional de­sire to stay ac­tively in­volved for a few more years.

To sat­isfy both ob­jec­tives, Jeremy agreed to be­gin the process of choos­ing the right suc­ces­sor from within his dealer firm and put­ting to­gether a deal that would al­low him to sell the eq­uity in his busi­ness now, but con­tinue to work with his clients for up to five years. Not sur­pris­ingly, there were sev­eral in­ter­ested can­di­dates and Jeremy is well on his way to max­i­miz­ing the value of his busi­ness with­out hav­ing to exit be­fore he is emo­tion­ally ready. Ge­orge Hart­man is CEO of Mar­ket Logics Inc. in Toronto. Send ques­tions and com­ments re­gard­ing this col­umn to ge­orge@mar­ket­log­ Ge­orge’s prac­tice-man­age­ment videos can be viewed on in­vest­mentex­ec­u­

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