mature businessman thinking at desk in office

“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 led 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.

Like wine, practice values rise slowly and then decline quickly

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.

Quality practices are attracting the highest prices ever

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.

Buyers outnumber sellers – for now

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.

Money is cheap

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.

Technology keeps changing

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.

Clients are getting older

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-year-old 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’s practice- management videos can be viewed on