What would happen to your business, your clients and the value of the company, if something where to happen to you suddenly? Do you have a plan and systems in place to ensure your business will carry on until you return? Or, a plan to ensure the business continues under someone else’s leadership if you cannot return?
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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.
Topics: age matters Erik Pahlow Maximizing Your Practice's Value Building Value/Business Valuation financial advisors valuation valuation expert Building a valuable practice David Grau Jr FA CMA Valuation Maximizing Potential advisors age of clients Asset Growth building value SRG Blog Succession Resource Group Valuation Tip
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Not All Revenue is the Same
There are many ways to grow your practice – the most obvious being adding more revenue, more assets and/or more clients. However, not all revenue is created equal in the eyes of a buyer, and not all revenue has value. The key is to ensure your revenue is predictable, and this can take place in a variety of ways for both recurring revenue sources (fees, 12b-1s, renewals, and trails) and transactional sources. Regardless of source, buyers will pay a premium for predictable cash inflow.
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Growth is King
One of the most important drivers of value in any business is growth. Historical growth, while no guarantor, is a useful proxy/tool for projecting a business or asset’s ability to produce revenue in the future. As a buyer, you will pay more for a practice that is growing each year than one that is getting smaller. One of the biggest mistakes advisors/reps/agents make is waiting too long to sell their businesses, often having contemplated selling for several years before they finally made the decision. By the time many decide to actually sell the business, they have been coasting for a few years, causing their growth to stall or even decline – making it a suboptimal time to sell. For financial service practices, growth of the business can happen in three specific ways. Anyone contemplating selling their business, or a buyer looking at practices to acquire, should pay attention to the following growth metrics.
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Depending on what source you look at, the average age of an advisor in the financial services industry is anywhere from 51-57 years old. While that would typically leave plenty of time until the average age of retirement, the average age of an advisor selling their business is much younger, most often occurring near age 59. This is due in large part to the long-term seller involvement that is ideal in the sale of a professional services business, ranging from as low as 12 months to as long as 5 years. While you may not sell your business, you will leave this industry – planned or unplanned. The better prepared you are for your eventual transition, the happier your clients will be with the process, and the more you are likely to get out of it (financially and emotionally).
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There are many ways to grow your practice – the most obvious being adding more revenue, more assets and/or more clients. The most valuable businesses in the industry however focus on building value in their enterprise every year, in addition to growing the revenue/asset base. There is a long list of recommendations that we would make as your succession/valuation consultant and the easiest way to understand these recommendations is to look at your business from a buyer’s perspective. When a buyer evaluates a business for purchase, there are many items reviewed in due diligence that drive or detract from the value, including the revenue sources, growth rate, age of the clients, location of clients, client service process and many others. Here is our first tip in this series of how to Build a More Valuable Practice: