Despite the recession and a dwindling eagerness among advisors to retire, Darren Miles, chartered business valuator, president and founder of Fair Market Value Inc., says there are currently more buyers than sellers in the market to buy advisory practices.
For both sides of a book sale, he says there is more to consider than just the bottom line — there are softer sides to your practice that can make it attractive or unattractive for buyers.
The most tangible asset is, of course, the business’s cash flow, Miles says. But hard numbers apart, there are other psychological aspects to keep in mind, such as investment philosophies or skill sets, whether you’re a buyer or seller. “After all it’s not equipment you’re buying, but a group of individuals. The more they can replicate your investment philosophy, the more returns you get on investment,” he says.
Some aspects to keep in mind are:
Capacity issues: If you’re buying a branch and integrating it with another, you need to consider what capacity issues exist in the book you’re acquiring — value of assets under management, number of working hours a week, capacity to pick up extra growth. The buyer needs to blend these two pies together, and try not to overheat the existing business, Miles says.
Transitioning the book: It’s also important to find out the transition objectives of the vendor — is he out in three months, or in five years? His objectives need to match the buyer’s goals. Some people can be controlling, Miles says, but buyers might not want an outgoing practitioner to stick around for long. “It’s important to analyze the owner’s ability to let go.
“There’s nothing wrong with having strong relationships with clients, but as you get to the exiting stage — the last 10 years — you need to transition relationships into the team so that you can be out of the office two to three months and have your team look after clients. It’s difficult, but doable.”
Goodwill allocation: The valuation of an advisory practice, Miles notes, is similar to the valuation of any service-based company. Because of there are so few tangible assets, goodwill represents the greatest portion of value. Goodwill is not based on revenue levels as much as it’s based on the resulting earnings and the qualitative aspects of those earnings — consistency and sustainability — driven by the strength of underlying client relationships, and coupled with a recurring and predictable fee structure.
Buyers don’t want too much reliance upon just one person in the practice, because it’s hard to transfer goodwill. If, however, clients are trained to interact with a larger team the business is worth more to valuators and prospective buyers.
If the seller is retiring, there is a good chance their client base is also getting older, and will not be around forever. Buyers need some method of dealing with intergenerational wealth transfer. If clients are in their early 30s, it might not be a huge issue. But buying a book of business with older clients (above 65) requires special attention.
Another thing to consider, Miles says, is the existing time demands on the principal: Is the client base demanding? Are clients accustomed to calling with every market hiccup? Is the principal in office six days a week?
“If the answer to all these questions is, YES, remember you’ll be inheriting all of it. So make sure you’re not purchasing something that drives you to work too hard, and gives you a heart attack in two months,” Miles says. After all, you’re not just buying a revenue stream, but an entire company and practice. “You’ll end up inheriting the responsibilities of the key person you’re buying from.”
Darren Miles, who specializes in valuing personal service businesses will be presenting a session on Managing Consolidation at the Advisor Distribution Conference, June 3-5. This session will examine how to buy an agency; properly evaluate the books of business; get the economies of scale right; and keep the advisors with the firm.
(05/14/09)