What's Your Practice Worth?

A Client Threshold

Because FPtransitions' marketplace is made up of mostly small practices, 88% of businesses for sale had between 50 and 200 clients. This seemed to fit with what buyers were hunting for, Goad says. The sweet spot for buyers, he says, was between 100 and 200 clients. "Those practices that had larger client bases for sale are more difficult to sell, but not because of profitability," Goad says. "It has to do with fewer buyers who can acclimate that number into their business."

The average age of a practice's client base also has a significant impact on value, he says. Fifty-eight percent of buyers were looking for clients during their prime preretirement years, between the ages of 41 and 60 years old. That was also the age range of 50% of the practices up for sale.

The number of women buying and selling practices was low compared with the number of women in the business, according to the report. While studies show women own about 26% of small financial-advisory practices, they accounted for only 18% of the practices for sale and represented only 5% of buyers, Goad says.

This might be explained by the fact that women have only recently started to make inroads in the profession. "Because they are still fairly new, on average, they're not ready to sell," Goad says. "We think over the next decade, we will see sales increase significantly."

In what may be an example of advisors getting out of the business while the getting was good, the report found that 47% of sellers were in business for 10 years or less. Typically, Goad says, practices are sold after 16 to 20 years in business. The rash of advisors looking for an early cash-out may have been a short-lived outgrowth of the recent bull market, he says. Even with the slowdown in latter 2000, the report found that advisor practices averaged 32% revenue growth in 2000 and 25% growth in 1999. "It (the bull market) allowed a lot of practitioners to make more money than they ever dreamed," he says.

Now that it seems a bear market has taken hold, advisors may see the flip side to this: lower revenues and later retirements. "We think that the practitioner who has been in the industry shorter term will see their income decrease and potentially the value of their practice decrease," he says.

Tibergien agrees, saying the market downturn may lead to a slowdown in mergers and acquisitions of practices. "I think that there are quite a number of people who are scared," he says. "Either they are going to try to sell and take their chips off the table or hang on for dear life because the market has impacted their ability to retire."