Sponsored by Credent Wealth Management
Financial advisors nearing retirement have a lot of choices about who buys their business. As an experienced buyer of financial planning practices, our firm has had hundreds of conversations about succession planning and merging. Sellers tend to have three big questions before choosing a successor:
- What is the value of my practice?
- How will you take care of my clients?
- How will you handle the transition?
These questions will be addressed during our free webinar on June 30 at 3 p.m. Eastern. Register here
On the flip side, buyers of planning practices are primarily concerned about:
- The cash flow and revenue of the seller's firm
- Product mix of the subject practice
- Character and reputation of the seller
- Seller's ability to effectively transition households to the new team
You can see that there is some overlap in the questions. The answer to each of these questions has several layers. Let's address economics first. There are a few key levers which drive the value of a practice:
- The amount of recurring revenue – more recurring revenue increases the value
- Demographics of the client base – a large number of clients in spend down will reduce value, which accumulators increases value
- Geographical location – growing metro areas tend to support higher valuations than stagnant or declining towns
But the valuation number doesn't tell the whole story about how much you will receive. Other key points include:
- Deal terms: how much money will be paid at closing versus over time? Will there be a true up which increases or decreases the total payment received based on client retention? Is there a shield from bear markets? Is there a conversion bonus?
- Tax allocation: Will payments be taxed as long term capital gains or 1099 income or employee income?
- Post-closing work and income opportunity: The buyer will likely want your assistance transitioning relationships and that is usually part of the deal. Do you want the option to keep working after the transition? How will you be paid for that work? What will be the compensation for new business and how will it be taxed?
Our firm offers a free one page valuation tool available at https://cxinstitutional.com/free-valuation-tool/.
The next question sellers have is about their clients. Successful advisors have developed strong relationships and even friendships with their clients and tend to care deeply about them. Sellers often want to understand a number of things about the new firm’s service offering including:
- Who will be serving my clients? Is there a single point of contact or a team approach?
- What is the investment management process? How do you handle low-basis positions in non-qualified accounts? How do clients access the capital markets? Is there a particular product or type of investment that will be used?
- Explain the proactive service you will provide to clients. How many meetings and are they in person or virtual? How many calls will clients receive? What is the system to ensure that the service is delivered?
- How does the firm utilize technology in the delivery of client service? Online account access? Account aggregation? Paperless delivery of statements and trade confirmations?
- Finally, explain the fee schedule. What is the firm’s philosophy about fees? Are larger households paying the same rate as smaller households?
The final big question has to do with transitioning the clients to their new team. There are two related but separate topics: Communication with clients and operational details. Regarding communication it is important to develop the messaging around your care for your clients, the careful due diligence process you have conducted, and finally your selection of the successors. (You can download our Due Diligence Process at https://cxinstitutional.com/articles/.) Communication with clients can come in the form of an announcement, but definitely needs to be followed up in one to one meetings.
As you can imagine, there are many operational details required to move an entire client base to a new team. To manage everything that needs to be done we have built an operational playbook addressing every task that needs to be completed. The whole process is driven by a project manager leading a team of operations specialists to get accounts opened and assets moved.
Join us at a free webinar at 3 p.m. Eastern on June 30, 2020 as we seek to answer these three big questions! Register here
