It’s hard to let go. You’ve raised it to maturity over the last 20, 30 or 40 years, and it’s been a major part of your daily life over that time. But there comes a time in every advisor’s career when they have to sell their practice. And as much as the phrase “succession planning” is thrown around in this business, most advisors don’t even think about an exit plan until it’s too late. In fact, only 29 percent of advisors have defined or implemented a succession plan, according to a Moss Adams study.

Richard “Dick” Lavoie is one who bucked the trend. At 73 years old, Lavoie decided it was time to retire. He felt it was in his clients’ best interest to make the transition while he was still alive, as opposed to waiting until his death forced the issue. As an independent financial advisor, he built a comfortable business over the past 40-plus years. Although he had never really thought about the concept of “selling” his business, he soon became aware that there were lots of buyers out there looking for a business like his. Soon broker/dealers and advisors were lined up, each outlining what they had to offer—both financially and service-wise.

But most transitions aren’t this easy. Advisors can often become attached to their practice, and for good reason—it’s their baby. But that attachment can often cause a tug-of-war between the seller and the buyer. And that’s if they even find a buyer.

Here is a 10-step game plan for structuring the sale of your practice as well as some pitfalls and perils to avoid: 

 

  1. Start planning early. It helps to have a plan in place as to what you are going to do when the time comes. Do you plan to sell your business to a senior or junior partner? Is a family member interested in taking over? Are you going to depend on your broker/dealer to help with the process, or are you going to use the services of an outside, unbiased platform?
     
  2. When selecting a firm to help with the process, check out your options. Often advisors rely on their broker/dealer to find a buyer and to provide financing for the sale, widely considered the easier path to take. However, this may be a conflict of interest if the b/d is both structuring and financing the sale. In that case, they are less likely to have the seller’s best interest at heart. When selling outside of your broker/dealer, the new firm is gaining new assets and therefore may be willing to pay a premium on the practice to the selling advisor.
     
  3. Make a short list of buyer criteria. For most advisors, concern for their clients’ well-being comes first. To ensure the right person is going to be caring for them, create a list of the characteristics the buyer should have. These were the things that were important to Lavoie: 1) commitment to clients comes before concern for compensation; 2) must be fee-based, not commission-based; 3) must be willing to use the assessment program he had successfully been using and that his clients felt comfortable with; and 4) must have a similar work ethic.
     
  4. Don’t try to go it alone. Use the professional services of a CPA and attorney. While Lavoie reviewed all the sellers’ offers, he sent his top four choices to his CPA for review and to make the final decision. While you may not have a solid relationship with your CPA, it’s still important to talk with him or her about how best to minimize tax consequences from the sale. Get an attorney to create legal documents, such as a non-disclosure agreement (NDA) and buy-sell agreement.
     
  5. Get a business valuation. While you may pay a valuation firm anywhere from $1,000 to $6,000 (depending on the size of your practice, number of principals, etc.) for this information, in the end it will work in your favor. By knowing the real value, you won’t chase prospective buyers away by overpricing your practice or perhaps worse, losing out on getting fair market value for a practice that you’ve spent years building. Often, a broker/dealer or a third-party seller offers a preliminary valuation that will provide you with a reasonable starting point.
     
  6. Get pre-approval for bank financing. You may think this is the buyer’s responsibility. But as more and more advisory practices are changing hands, some banks are seeing the value of becoming the “financier of choice” prior to a buyer being selected. You can provide them with most of the documentation they will need to get started. They just need to know that your business is worth what you are asking for it.
     
  7. Get documentation in order. Most lending institutions and buyers will want to see at least four years of tax returns. They’ll also need the number of years in business, number of clients and their average age, overhead expenses and the breakdown of fees versus commissions.
     
  8. Determine payment terms. Payment terms can vary for each advisor, but in many cases the seller will ask for a 30 percent down payment. They then typically set terms for the balance to be paid at an amount they are comfortable with and that will not burden the new owner. Often this will be three to five years. In Lavoie’s case, he will receive 30 percent down and 22 percent of the balance every nine months. By taking the money in smaller increments, it helped to alleviate the tax load, he said.
     
  9. Prepare your current broker/dealer for the sale. If the buyer is with a different broker/dealer, you should let your b/d know that you are planning to sell and would like their cooperation with transferring client accounts. This request can be met with a positive or negative reaction, which is why it is also important to find out the transition process of the b/d or firm where the client accounts are going.
     
  10. Establish what part you will play in transitioning clients. For Lavoie, making sure his clients were comfortable with his decision to sell the business included sharing with them his reasons for retiring and introducing them to the new advisor. He also committed to spending six to 12 months with the new owner to ensure the transition process goes smoothly. In some cases, the seller will agree to continue working at the firm for a longer period of three to five years.

Lavoie says that one of the most important things he did when selling his business was to be open and honest with prospective buyers, clients and his broker/dealer. “Because I was open with them, they were open with me,” he says. “It makes retiring after so many years in this business much easier for me and for everyone involved.”

 

Phillip Flakes is the co-founder and managing partner of Succession Link, a firm that provides financial advisors with a platform for buying and selling financial service practices. Flakes is also co-founder and managing partner of StarPoint Consulting Group, an advisor placement firm.