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.