Selling your practice in pieces may benefit you-and your clients.

The operative paradigm in our industry is that one sells an advisory practice to retire or to move on to a different career. He finds the highest bidder and the best terms, transfers the practice, does what he can to help transition the clients, and then escapes to a different life. But for many new sellers that's not what really happens, because they have discovered the benefits of the "partial sale."

Says William Grable, CPA, co-owner of Business Transitions LLC (www.businesstransitions.com) in Portland, Ore., a market-maker for the buying and selling of advisory practices, "Someone will call and say they're thinking about selling a whole book, but we find out they just want to make their life simpler, so we ask 'Why not sell just what you don't want and keep what you do?'"

Grable describes a condition most advisors can relate to: "When we first start out, we take everything and everyone. Later, when we've developed our business model and target market, we find our early clients no longer fit." Maybe the advisor has changed from a commission-only to a fee-based business but still has "day-trader" clients who just want to do transaction business. Or maybe the advisor has moved around the country and no longer wants to travel back to New York to visit a small group of clients in that region. Most likely, though, he's applied the 80-20 rule and wants to shed those clients who take 80% of his time and only provide 20% of his profit.

"One of our partial book sales recently attracted 36 inquiries and sold for $110,000. The seller liked the buyer so much, he sold for no money down. The downpayment was made in the form of a note to be paid out over time, and the remainder was structured as an earnout," says Grable. The seller is now mentoring the buyer and structuring his second sale, this time to an employee. The deal structure on this second layer of clients is different, though. The buyer will put 10% down, 40% on a note and the rest on earnout, leaving the seller with one-third of his original practice. Says the seller, Gordon Bernhardt of Bernhardt Wealth Management Inc. of McLean, Va., "I initiated these sales for quality-of-life reasons. I knew ultimately that everyone benefits if they are done right, including my clients."

But how could clients benefit, particularly if they're being sold because they're unprofitable to their original advisor? Wouldn't the buyer find them unprofitable as well? Not necessarily. "When I was starting out as a CPA," says Grable, "I always heard the advice that you should reach for the clients who are best for you, but you've got rent coming due so you take whatever comes your way. You rationalize this departure by saying to yourself, 'I'll just work with this client to get some experience.' Even if the relationship isn't as profitable as you would like, you're learning how to be an advisor and you might also get some good referrals from these clients." After many years in business, it's time to reassess the hodgepodge of a client base you've created.

This is what Bernhardt did. "My associate planner, Carolyn Walder, and I were talking one day about our clients, and found they fell into one of four categories. First, there were clients who fell way below our minimums and were unprofitable to serve on a fee-only basis. Second, there were 40 clients who were good for someone starting a business but not ideal clients for Carolyn or me. Third, there were another 90 profitable clients who were still below my ideal minimum, yet perfect for Carolyn. And then there were the ones I wanted to keep," says Bernhardt.

So Bernhardt jettisoned about 30 clients, sold another 40 to his new pupil, sold 90 to Walder, and kept the approximately 80 remaining clients. He found the buyer for his 40 clients on Business Transitions' RIA Transitions site (www.riatransitions.com), one of a number of markets Grable and his partner, David Grau, maintain for prospective buyers and sellers. "That was my first listing at RIA transitions," says Bernhardt, who found the perfect match in a buyer with years of experience in the banking industry and a planning and investment philosophy closely aligned with his own. "He's moved into my office, where he leases space, and we have such a good relationship that I mentor him. I know those 40 clients are better served by him than they were by me."

Walder will start her own practice with two other employees of Bernhardt's original firm. "She's got a nice book of business, 90 clients and about $28 million under management," says Bernhardt. Not only that, but it might be argued that the clients Carolyn retained are better for her lifestyle. "She's married with a family and has more time demands than me," says Bernhardt. "Although Carolyn and I have the same skill sets, we have a somewhat different ideal client niche. Carolyn doesn't mind working with clients who are above the middle market but not highly affluent ... clients who might be a little bit less complex than the ones I would consider ideal for me," he adds.

And how about the clients Bernhardt has left-the 30% of his original base that he didn't sell? He will retain two other employees, one admin person and a client service individual, to serve the remaining high-net-worth clients. Although his motivation for this broad restructuring was simplification, that doesn't necessarily mean Bernhardt wanted fewer clients. What he wanted was a homogeneous client base because, like many advisors, he's discovered that higher-net-worth clients-if served with the right business model-can take less time and add more profits per client than less wealthy clients. He will go on to seek out another 70 clients who match his new, smaller base, to round out his vision of the ideal practice.

The bottom line was a win-win-win for Bernhardt, these other advisors and the clients. The clients are each being served by advisors to whom they are well matched in terms of their experience and eagerness to please. The advisors all have clients whom they consider "ideal." And Bernhardt figures he maximized the value of the 70% of his practice he unloaded. "I think it's a fair assumption that I couldn't have gotten as much for that part of my business if I hadn't sold it in pieces; each buyer was ideal [for the segment he or she bought]."

And this is the aspect of partial book sales that is perhaps most intriguing from the seller's standpoint: The sum of the parts may just be greater than the whole. That is, selling the business in pieces-each piece geared to its ideal buyer-may just net the seller more than if he sold the entire practice to a buyer who didn't value all its parts. A buyer evaluating a practice with several diverse client segments, some of which don't appeal to him, will likely offer a lower multiple than if he found all the clients highly desirable.

"That is absolutely true," says Grau, Grable's partner. "For example, we listed a practice last week in Delaware, Ohio, with $17 million of assets under management and $176,000 in gross annual revenue from 12 clients, all retired airline pilots. The seller listed it at a multiple of 2.5 and asked for higher than normal terms-50% cash down-and he got 52 inquiries in the first three days of the listing. If one were to add to this 50 more clients with only $5 million in assets under management, collectively, there is no way the whole practice would have gotten the 2.5 multiple." However, if the seller found a willing and eager buyer, perhaps a younger practitioner, for the "bottom 50" and sold them in advance, the weighted average multiple he'd get on the entire practice would certainly exceed that which he'd realize from a single buyer. According to Grau, the seller might need to be a bit more generous in his terms and his willingness to mentor the younger buyer than he would the more experienced buyer.

But here's another angle to consider. Says Grau, "At least half to two-thirds of every sale is 'success-based,' meaning that either a contingent note or earnout arrangement is used. If the buyer doesn't match up well with the clients there will be attrition, and despite a high selling multiple, the final price will fall and the multiple of value will be lost. That's why these practices rarely are sold to the highest bidder. Imagine the junior advisor in the example above calling on the 60- to 70-year-old retired pilots, each with $1 to $2 million of assets; certainly some of these clients would go elsewhere. Conversely, finding a senior-level highly capable advisor to expertly handle these airline pilots is relatively easy, but such a person almost certainly would be a poor fit for clients with only $25,000 to $50,000 in funds, so they also would likely drift apart and lower the eventual value of the sale."

Advisors forget that in today's marketplace, most practices with $1 million or less in gross revenues sell on an earnout basis, so multiples and downpayments do not characterize the ultimate success of the sale. They are merely interim guidelines. The real success isn't even measurable for two to three years after the sale. "The fit is everything," says Grau. "Value derives from the success of the matchmaking. Partial book sales increase value because the clients, who are the ultimate judges of value, get the exact match they want and need."

So if you wake up each morning trying to figure out anew how to simplify a practice that has grown in too many different directions and leaves you feeling out of control, perhaps a partial book sale is in your future. It may just be that you need to critically analyze your client base to find the source of your problem, and then act on those findings.

David J. Drucker, MBA, CFP, a financial advisor since 1981, sold his practice 20 years later to write, speak, and consult with other advisors.