It's a white-hot seller's market in financial services practices. Over the last 18 months, for every one independent financial advisor, RIA or insurance agent seeking to sell their business, there are 50 interested potential buyers ready to explore acquiring it.
So says David Grau Sr., co-founder-president of the consulting group FP Transitions. Grau is a former industry regulator who's arguably the foremost expert on financial services succession planning and business-perpetuation strategies.
ThinkAdvisor recently interviewed Grau, 57, who shared each of his Top 10 lists of critical considerations for selling and buying a practice.
Right now, mergers are the most popular M&A strategy on which FPT is helping advisors and agents. Indeed, the firm has completed more mergers in the last year than during the previous 10 combined, Grau says. That means sellers aren't just selling and walking away; they're selling and sticking around.
FPT, based near Portland, Oregon, helps independents through the complex process of buying and selling and, in addition, provides each seller with 50-plus qualified buyers from whom to choose.
Grau's new book, "Buying, Selling & Valuing Financial Practices" (Wiley), is a granular guide to selling for maximum value and at optimal tax rates. For buyers, it's a how-to about making an acquisition on the best terms — and then gradually writing off the purchase price.
Key to the whole process is sellers and buyers commissioning formal valuations of their practices. FPT has valued more than 8,000 practices since the firm launched about 20 years ago.
Before that, Grau was a state securities enforcement officer and National Association of Securities Dealers (NASD) Seattle office liaison. His former private securities law practice served RIAs.
FPT works on the independent side exclusively but with both individual advisors in the field and at the corporate level with firms such as LPL Financial, Fidelity and MetLife. In latter mode, it helps advisors build lasting independent businesses or sell their one-generational practices.
ThinkAdvisor spoke by phone with Grau about the overriding reasons for today's strong seller's market: numerous aging advisors, fee-based businesses sometimes worth as much as seven figures, and the hassle of ever-more rules and regulations. Plus, the expectation for a bear market in the not-too-distant future is prompting procrastinating sellers to say, "Hey, it's time."
Most of all, Grau says, advisors want to sell their business to a firm that's the mirror image of what they've built – but two to three times larger.
Here are 20 tips for buying and selling a practice, as told by Grau to ThinkAdvisor:
TOP 10 STEPS FOR SELLERS:
1: Get a Position Fix
What have you built, and how have you built it? Do you own a job or a book? A practice? A firm? If you've built only a book with a cash-flow stream, you'll need a completely different set of documents, tax strategies and valuation approaches than if you built a business with infrastructure, staff and enduring strength. 2. Focus on the "M" in M&A
Mergers are the most popular M&A strategy we're dealing with right now. Technically, a merger is two practices coming together with most of the key personnel staying on. This way, you try to create one larger, sustainable business by joining forces with someone else and double in size. It's a great idea.
3. Obtain a formal third-party valuation
Gather all the facts about your practice: Client demographics, how you earn your money, growth rate, regulations you operate under and so on. Put all that on a 12- to 15-page form and turn it over to a third party for analysis. They give you a number – the sum total of 20 or so years' work – indicating what you've built and what the marketplace says it's worth. This is the largest number in the advisor's life. To reap its benefits, they can use it to attract next-generation talent as a partner, sell the practice or merge it. So after a valuation, all of a sudden, they realize they have to do something more than just enjoy the cash flow because now they've got a small business. That [big] number wakes them up.
4. Understand the impact of terms and taxes on value
You must tie value to payment terms and taxes. You need to think about taxes and what you can expect on an after-tax basis, how the proceeds will be taxed and what you can do to control or reduce the tax bill. As for terms, if you get nothing down and a promise to pay over five years out of the cash flow your clients generate, you've taken all the risk. The buyer may promise you a multiple of three times, but if you get nothing down and a five-year earn-out all in ordinary income, you've got a lousy deal.
5. Consider alternative strategies, such as sell-and-stay opportunities
We developed this strategy for owners who don't want to quit working but want to sell their business to a [larger] party. The seller takes a job with the buyer and continues to work on a W2 basis. That way, they can slowly integrate their 150-200 client relationships into the bigger firm. This slows everything down and gives you more time to do a better job for your client base.
6: Study reliable benchmarking data
If you want to build a business that's sustainable for the long term, be careful who you're modeling after. If the benchmark data is from 90% of people who have built something that's not sustainable, profitable or valuable, following what they're doing is a bad tack. Benchmark off people who are going in the direction you want to follow someday.
7. Create a plan and definite timeline
An idea and a hope is not a plan. Develop a plan: Write it down. Test it. Do the math. Read and study: terms, taxes, value. Determine what you can expect, what you should demand and when you should sell. Talk to professionals, like a CPA or lawyer, or your broker-dealer. 8: Have a backup plan
Sometimes you get hit by the proverbial bus; so you need a continuity plan, someone to take over from you because of disability or death. Always have a backup plan just in case you don't get to finish what you've started.
9. Sell on the way up
