What's Your Practice Worth?

It's highly unlikely that the situation improved in the first three months of 2001. Indications that buyers were becoming more interested in commission businesses were another consequence of the soft market, he says.

Goad also noted that about 75% of listings came from sole practitioners.

Another trend that seems to be sneaking up on the industry is the number of CPAs moving into the business, Goad says. About one-fifth of the non-sole practitioners in the FPtransitions marketplace were CPAs, he says, adding, "CPA activity is picking up." Many CPAs feel the most efficient way to get into the financial-advisory business is through mergers and acquisitions, he says. "Many are coming to the conclusion that it makes sense to merge their client base with a financial-services client base and trade the services off each other," Goad says.

Many practices that are up for sale, according to the report, are missing the mark in one of the basic ingredients of value: sufficient revenues.

On one commonly used benchmark, practice revenue as a percentage of assets under management, sellers were most likely to list practices with revenue-to-asset percentages of 0.51% to 0.75%. Twenty-nine percent of seller listings were in this range, while 23% were in the 0.76% to 1.0% range. Seven percent had revenue-to-asset percentages of 0.50% or below.

However, 48% of buyers were looking for practices between a range of 0.76% and 1.0%.

Where did that leave the 36% of sellers who were short of this mark? In many cases, with closing prices tens of thousands of dollars less than they could have been, according to Goad. FPtransitions has found sellers falling short of 0.76% revenues-to-assets usually have to settle for lower price-to-revenue ratios once a final price is agreed upon, he says. "It left them bringing less value for their practice," he says.

The returns sought by buyers isn't surprising, since the typical fee-based advisor charges an annual fee amounting to 1% of assets under management. "The point is that sellers need to prepare their practices for what buyers want," he says. "If you don't have the return that matches with what buyers want today, you need to spend some time retooling your practice."