Age matters – we all hope it doesn’t, but the reality is that the age of your clients and their corresponding assets can have a drastic effect on the value of your business. An aging business is a dying business in the eyes of a buyer who is considering the long-term buying potential of the your book of business. One of the most important things to increase the value of your business, and one of the most difficult items to change, is the age of your clients and the amount of multi-generational planning that takes place in your company.
Many advisors have a concentration of clients over the age of 70 – even if a minority - these clients often have a disproportionate amount of the total assets under management. These clients are viewed by a buyer as higher-risk based on factors like: RMDs (Required Minimum Distributions), clients drawing down on their accounts, passing money down to heirs, have little to no potential for an increase in assets, advancing charitable donations, and unfortunately having a shorter life expectancy. The inverse is also true. While having a younger demographic (clients under the age of 50) will help increase your value from one perspective, having a high concentration of these clients may ultimately decrease the value in terms of assets per client and revenue per client as these clients are still typically in growth mode. So, how do you effectively mitigate this perceived risk?
To a buyer/successor, the future earning potential of the business is paramount in how they value a business. The more risk a buyer sees in the demographics of your client base, the lower the value will be when you execute a deal or the greater contingent financing you are likely to receive (i.e., less money down at closing and a variable payment stream). While there is no magic solution to make your clients younger, active and ongoing management of the practice and increased awareness of the potential issues, will allow you to take steps to optimize your practice’s value to ensure you talk to the best possible successors when the time comes.