How to create a sellable business

Does that sound like a good idea to you? Welcome to the world of earn-outs.

A sale, on the other hand, gives a business owner a nice payout and no obligation to stay on as staff. So how can you build a successful advisory practice that gives you the option to get a real sale when it's time to retire as opposed to an earn-out?

Many of the same steps you may need to take to build a more sellable buisness will ultimately create a better-run business. (Photo: iStock)

Building a sellable business

One of the biggest issues with a financial advisor's practice is that many advisors focus on cash flow but forget about equity valuation. It's a service-based business, so this is natural. But in order to create a sellable business, you need to focus on cash flow and overall equity value.

You essentially need to create a well-oiled machine that can run without you.

After speaking with Mike, here are seven things I suggested he do in order to create a business that sells, rather than one that earns-out:

1. 1. 1. 1. 1. Delegate operations. Your financial advisory firm needs to be able to operate without you being there. This means that you need to better train your employees to handle all of the responsibilities within your office. You've got to wean your business off of it's dependence on you, and every other employee as well. You more than likely will need to hire additional employees in order to do this. The business needs to run smoothly while you are away.  If you aren't sure if your business can do this, here's a test.  Take a 1-2 month sabbatical and you will see really quick whether or not your business can run without you being there.  This test will also bring light to what responsibilities and problems your being gone creates.  Things you need to fix will be exposed.
            2. Build out processes. In addition to better training your team, you've got to build out and document your processes. Your processes should be so clear that if any one employee left, another employee could easily step in without having to reinvent the wheel. This gives potential buyers confidence that your business is resting solely on your shoulders, or the shoulders of any single employee.
            3. Set up a solid sales team. Many advisor sales come 100 percent from them, and no one else. This is not the making of a sellable business. Instead, focus on creating a sales team that can bring in the lion's share of revenue so that your business can not only operate, but grow, when you are gone. Again, your sales process needs to be documented and easy to follow so that a new owner could bring in fresh sales people to follow it and succeed with the tested proven formula you created.
            4. Know your niche.  Many advisors build a business where they are the "jack of all trades" and handle every little thing a client needs, from Medicare to investments and everything in between. To maximize the value of your business, however, you are better off focusing on one or two areas that your business can do really well.  It's much easier to duplicate your process with others this way, and it also increases the quality of the work you do as you can train and hire specialists as opposed to generalists.
            5. Your numbers are golden. You need to measure and track all of your numbers in order to sell your business. You need to be able to show real cash flow. You should be able to show the cost of acquiring new clients, as well as the sales ratios. If a new owner were to invest $100,000 in marketing in your business, with your processes built, they should have a reasonable expectation regarding the amount of revenuethat investment would generate.  All of these are things that a potential buyer will want to know in order to take buying your business seriously. 
            6. Establish high-volume, reoccurring revenue. Is your business built solely on up-front commission sales, or do you have reoccurring revenue that comes in each and every year? In order to maximize the value of your business, you've got to have ongoing revenue. The bigger your business is, and the more ongoing revenue you have, the more attractive it is to the potential buyer, which will increase your valuation.
            7. Diversify your client base. You also need your business diversified among a large and type of of clients. If 35 percent of your revenue comes from one client relationship, it's going to be discounted. This is a perfect example of the success of your business being dependent on one person.  

As a financial advisor, whether you want to create a sellable business, or one that is just a cash flow machine. Many of the same steps that we've outlined above are required as you are ultimately creating a better run business. This is a work in progress, and will take time, but once this is created correctly your business will give you more freedom and satisfaction than you ever could have dreamed. The possibilities for your success are endless.

Shawn Sparks is the author of the "The Advisor Breakthrough." Click here to find out more about Sparks and download the first section of his book.

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