Maximizing the Value of a Financial Practice

When to Sell A Practice

LPL Financial

Advisors who are considering retiring or selling their practice must not only plan carefully in advance, they must also know when the time is right for maximizing value. Learn when it makes sense to hold on to your business, and when to strike when the iron is hot.

Connect with one of our experts to discuss succession planning or to request a business valuation.

To sell or not to sell: timing the monetization of your practice to maximize value

When it comes to selling your financial advisory practice, timing is crucial. So when is the right time to monetize?  Since valuations are based on projected future cash flows, businesses command the highest values just before they hit their peak. Therefore, advisors who are considering retirement must plan carefully in order to sell their practice when it commands peak value.

“My revenue is stable, why should I sell?”

Businesses in decline do not fetch the same sales multiples as businesses with rising revenue projections. As clients age, their client lifetime value decreases. Assets under management for an older clientele no longer in the accumulation phase tend to shrink over time as they are withdrawn and as clients pass away. In order to simply maintain the value of your practice, younger clients and new assets must be added on a regular basis. Due to these factors, the temptation to leave your practice on autopilot can decrease the value when it comes time to sell your business. Even if year-over-year revenue is stable, the value of your business could be eroding if the underlying fundamentals are not carefully tended to (see Figure 1).

“I am not ready to retire just yet.”

Many advisors enjoy their job and have spent most of their lifetime building a book of business consisting of clients and friends they truly care about and wish to continue to serve. The good news is that monetizing your business doesn’t mean you must fully retire. LPL’s Advisor Financial Solutions team can help structure deals that allow you to monetize today and retire later. These are commonly called “sell-and-stay” or “sell-and-service” models, and they’re growing in popularity.

“The sales multiples on revenue are not attractive enough for me to sell now.”

Misconceptions about sales multiples are another factor that leads some advisors to sell their practice past its peak value. Although the average sales multiples are hovering around 2- to 2.5-times recurring revenue and 1- to 1.2-times transactional revenue*, it’s important to note that these multiples are based on gross revenue before expenses and tax, rather than on take-home pay. Once expenses and ordinary income tax are factored into the equation, the sales multiples typically range from 4- to 5-times net income when expressed in terms of take-home pay.

Tax implications on income are another factor to consider**.  The income earned from operating each additional year is subject to ordinary income tax, whereas income earned from the sale of your practice is subject to a much lower capital gains tax rate.

Is the value of your practice growing at a rate that outpaces the tax advantages of selling your practice at its current value? Does the estimated terminal value of your practice plus the net cash flows (take-home pay) from working additional years exceed the current market value of your practice? These are important questions to consider when assessing the appropriate time to monetize your business.  Operating risk should be monitored and assessed as well. For example, market level risks and individual health status risks should also be considered when determining the marginal value of continued operation.

Be informed and in control of your decision to sell

Whether you are eagerly awaiting exciting new ventures in your retirement, or can’t bear the thought of walking away from your work any time soon, it’s important to plan your succession responsibly, in the best interest of your clients, and so that you can obtain the value that your life’s work deserves.

Here are a few best practices to follow in order to monitor and maximize the value and marketability of your practice:

  • Plan: Create a business plan and track your progress at regular intervals by using metrics to determine if you’re meeting your goals. Revise the business plan as part of the planning cycle; treat it as a living document.
  • Monitor: Have a valuation performed in order to understand the current value of your practice and gain awareness of the drivers that determine its value, and obtain an updated valuation annually. Consider participating in LPL Financial’s Valuation Consulting Program.  Contact the Advisor Financial Solutions team for more details.
  • Create: Take time to consider how you envision exiting the business, and form a strategy.  Discuss this openly with important stakeholders such as your business partner(s) or spouse in order to create an exit strategy that will satisfy your goals while maximizing or at least preserving the value you’ll receive upon the sale of your practice.

Structuring the deal

Discover the three most common methods to structure a book of business or practice acquisition deal.

5 Strategies for Improving Business Valuations

Download our white paper to learn the five changes you can make now to improve the value of your business when it’s time to sell.

Start the conversation

Connect with one of our experts to discuss succession planning or to request a business valuation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

*Based on LPL data collected from 2015-2017

**This does not constitute tax advice.  Please consult your tax professional to assess your specific circumstances.