Selling a financial planning practice: tips for a successful transition

Due to tighter compliance requirements and changing personal priorities, many advisors are starting to think of selling their practice.

But selling a practice isn't like listing a products store for sale. Your client base is your main asset, and you need to manage the ownership transition carefully to keep your clients' confidence and trust.

Getting your record-keeping systems in order is one way to increase the perceived value of your business and make the transition smoother. Below are the steps you can take to create a stress-free, successful sale.

Your clients are your biggest assets

You've spent years building up your business, but maybe the time to sell your financial planning practice is drawing near. Do you just slap a "For Sale" sign out the front and hope for the best?

Selling a financial planning practice isn't like selling most other businesses. Customers buying from "Widgets R Us" generally don't know — or care — who owns the store. But customers using a qualified professional like a doctor or financial planner do care.

Think about it: if the doctor you'd been seeing since childhood retired tomorrow, would you feel comfortable seeing a brand new doctor at their practice out of the blue? Or would you feel better if your existing doctor introduced you to the new one and handed over your notes with care?

Your clients have built up a rapport with you over the years. They deserve to be treated with respect, which means planning your sale carefully and transitioning them smoothly through to the new owners.

Why you might want to sell your financial planning practice

While everyone has their own motivations, here are common reasons advisers decide to sell:

Retirement

The average age of financial planners in Australia has been climbing for years, which means many will be looking to retire over the next few years — particularly as a result of industry changes.

New education requirements

Following the Royal Commission and FASEA-era reforms, advisors have been required to meet more stringent education criteria. Many experienced advisors have brought forward their retirement rather than spend the time and money on additional qualifications.

Changes in grandfathering commissions

Changes in grandfathering commissions and trailers have drastically diminished the value of many advisor businesses. Multipliers have dropped substantially, with a clear impact on the standard advisory firm business model.

Other reasons

Other common causes for choosing to sell include:

• Relocating
• Personal circumstances, such as ill health
• The need for a change

Whatever your reason, with so many advisors looking to sell up, it's worth starting to plan your sale now. You'll have less competition, more time to find the right buyer, and could significantly increase the selling price.

Ways to sell your financial planning practice

How you sell your practice may depend on your licensee. Some networks have buy-back arrangements, others let you sell within or outside the licensee network with permission.

Other than this, your selling options basically come down to two methods.

1. Selling internally

Selling your business internally means selling to either a family member or an employee. If your new owner is a current junior member of your business, you may implement a transition over an extended period to make sure they're ready to take on running the business. If they're not already on your team, look at hiring someone now with the view to them purchasing your business when the time is right.

2. Selling externally

Selling externally involves selling to another business or person with no connection to you. This option can be very time-consuming and complex. It may be worth using a broker to help take the hassle out of the process — but make sure you check they're reputable before engaging their services.

How to prepare your business for sale

What do buyers look for in a financial advisory business?

Anyone looking at buying your practice will want to carry out due diligence. They'll want to see that your business has been running profitably and has a sustainable future. As part of that, they'll want to examine:

• Previous financial records to assess profitability and any money owing
• Client records to see your mix of client base and products
• Asset lists to determine what assets your business owns

Be prepared to answer questions about how many clients you've brought on recently, the structure of your client book, and the regulatory history of your client agreements.

What can you do to get your business ready for sale?

Get your records in order

Buyers can see the value of your business more easily if you have good record-keeping systems in place. Keeping accurate records is also a requirement of both your licensee and ASIC.

Your client records need to be in good order within a proper System of Record like Xplan. Licensees also generally require you to digitise your records within a relevant system before you leave the business.

Storing your records properly within a System of Record allows you to quickly generate reports for the potential buyer — revenue numbers, client demographics, retention rates, and any other information they need for due diligence.

This is where Umlaut can help. Our Phoenix data migration service gets your historical records into Xplan, and our BI & Reporting service builds the dashboards that let you track and present the metrics buyers care about.

Business processes

Many business owners keep all their processes in their heads. If you're thinking of selling, you need to get everything formalised "on paper" to enable a smooth transition. Clear, formalised procedures give any prospective buyer more confidence in your business — they show your practice is running well and doesn't just rely on you to survive.

If you're trying to get your business ready to sell without tipping off your clients or team, sorting out your record-keeping just looks like meeting requirements. It doesn't have to be a red flag.

Work out your business value

Your main asset isn't your stock or equipment — it's your client list. And that can be hard to value. You can calculate the business value of your financial practice in different ways.

Multiple method

The multiple method compares the quality of your business with similar businesses. It calculates value as either multiples of revenue or multiples of cash flow.

For multiples of revenue, you apply a multiplier to your firm's trailing 12-month revenue. Since 2018, prices being offered for advisory businesses have declined — partly due to stricter compliance, partly because finance is harder to obtain, and partly because more businesses are on the market. In this buyer's market, higher-quality advice businesses tend to sell for between 1.5x and 2x recurring revenue, while conventional advice businesses sell for between 0.5x and 1x.

The multiple method can also be used with multiples of cash flow, often calculated using EBIT.

Income approach

Rather than comparing your business with others, the income approach bases valuations on actual income estimates:

• The discounted cash flow method uses your cash flow forecast, then applies a discount to bring the value back to the current time. Accurate, but complicated.
• The single period capitalisation method is a less complicated income approach that assumes a normalised growth rate.

Fine tune with research

Whichever method you use, fine-tune your price by researching what similar businesses are selling for in your area. Your end price can be influenced by location, mix of clients and demographics, earnings potential, profitability, and future growth potential. Every business is unique, so it can pay to seek the advice of a business valuator.

What to do during and after the sale

Just as you'd like to smoothly transition to seeing a new doctor, make sure you transition your clients to their new financial advisor. Create a takeover strategy as a roadmap to ensure the transition goes smoothly:

• Communicate clearly and often. Contact your clients to let them know about the sale and any impact it may have on them. The more you communicate, the greater their chance of staying with the firm during and after the transition.
• Introduce your clients to the new owner. Meeting together to go over portfolios and answer questions improves their chances of remaining with the business and increases confidence in the new advisor.
• Be available after the sale. Be willing to answer questions from the new owner or help with any issues for a period after the sale.
• Enjoy your new life. Move on to the next stage knowing you've done your best to ease the transition for your clients.

Umlaut can help prepare your business for sale

Even if you're only thinking about selling and haven't decided whether to take the leap, a succession plan disaster-proofs your business. It provides security for the practice you've spent your life building.

Making sure your business records and data management are in order is what we do. Whether you want to prepare your financial planning practice for sale or simply set your business up to flourish, see how we can help.