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Want to Sell in Five Years? What RIAs Should Do

February 16, 2017

It is a common refrain we hear from advisors: “I want to sell my business in five years.”

For advisors, the sale of their practice or firm may be the largest financial transaction they will ever handle and often represents their largest personal financial asset. As a result, it’s important to take the process seriously and begin to develop a timeline and a long-term strategy in order to achieve your goal of a smooth exit.

In order to sell in five years, advisors should be making changes to their business immediately beginning with a plan to institute highly professional processes and procedures.

The first priority for advisors wishing to sell should be books and records. Advisors need to have the discipline to keep clean and clear books and records for several years before a sale. You are at a disadvantage if you have to explain things later or clean up your books at the last minute.

Advisors' second priority should be compliance and legal considerations. Whether you have an in-house compliance and legal team or outsource to a law firm, it’s important to have a documented, robust compliance and legal structure in place.

The third priority is your client base. Advisory practices are more valuable if they have an area of specialization and if they have a diverse client base. One practice that distinguished itself by specializing in the high tech market and now has a large group of high tech entrepreneurs and founders as clients is very well-positioned in the market.

For RIAs, the more you can institutionalize your client relationships with your firm and have a consistent client experience, typically the more valuable your firm will be. Clients will have a relationship with your brand and not just with you, and thus are more likely to stay once the business is sold.

It’s key to take a hard look at your clients and determine if there are steps you can take to broaden your client base and diversify your revenue. It’s common sense that you don’t want a situation where one family constitutes a large percentage of your client base. It may make sense to tap into centers of influence such as accountants and lawyers as a way to get referrals.

You might also consider adding advisory teams with complementary strengths and client bases that round out yours. The typical advisory firm in the Dynasty network has gross income above 60% and after owners’ compensation net income above 20%.

Demonstrating healthy top line and bottom line growth over time will enhance your firm’s value. We also suggest that you look to outsource anything that is not core to business and that can be done cheaper or better somewhere else. There are lots of firms in the marketplace now that, like Dynasty, have integrated platforms to allow pushing middle-office services to a partner firm, enabling the advisory firm to focus on client management and new client acquisition. It usually takes the principles time to grow the firm – so the more time that can be freed up, the better.

The fourth consideration for advisors looking to sell is your staff. We strongly recommend that advisory firms have a plan around human resources, employee retention and professional development. The goal is to have a team of long-term employees who are committed to the business and to the clients. Getting an equity ownership plan in place around a transaction can also often help with employee retention and generate excitement among the staff about growing the firm going forward.

Buyers of RIAs also want to know that there is a succession plan. You should be planning now for that next generation of advisors (and clients) so there is a seamless transition when older advisors decide to exit the business. You want to avoid a situation where one advisor controls the entire business and there is no plan for the future of the business.

When advisors say ‘five years,’ I counsel them to be flexible regarding timing. Like many other markets, there are a number of factors that can influence price and prices can fluctuate widely depending on market sentiment. It’s best to have a rough time frame and be strategic when you actually decide to sell because, after all, the best time to sell an asset is when you don’t have to – and that asset is a valuable one because you have professionalized the business in the ways we have discussed here.

If you need help, reach out to a firm that helps advisors with succession planning or contact one of the boutique investment banks that work with advisors. They can often also connect you with buyers when the time is right.

When it comes to selling your advisory business -- just like the advice most advisors give their clients -- “The more time to plan and the more thought that goes into defining goals and objectives, typically, the better the outcomes.”