For many independent financial advisors, the proceeds from selling their business are a fundamental part of their retirement plan. An advisor’s practice often represents their most valuable personal asset, exceeding homes or any investment portfolios they may have. It’s no wonder, then, that much has been made over the years about independent financial advisors in the waning days of their careers maximizing value. But what does that exactly mean?

Many longtime advisors are not entirely sure what they should be doing down the final stretch to shore up and boost the value of their businesses in the eyes of potential buyers. Here are six important steps to take:

1. Get A Position Fix

People often use the terms ‘book of business,’ ‘practice’ and ‘firm’ interchangeably. But they all mean different things, and such differences go a long way in determining the value of an advisor’s business and the realization of that value. In simple terms, a book of business is all about production—the advisor owns their client relationships and has no real obligations beyond providing service and generating revenue for themselves. This model of ownership, which is the simplest to transfer, describes most of the industry. Meanwhile, practices, generally speaking, consist of one owner and two or more advisors working side-by-side, utilizing the same support infrastructure and compensation models. Firms are similar to practices but are typically multi-generational with more than one owner. 

2. Focus On The “M” in M&A

Mergers allow those near the end of their career to partner with a business or firm, effectively exchanging the value of their business for equity in a larger firm. As a part of this move, ‘sellers’ can continue to work for a few more years, slowly transitioning over their clients and enjoying the benefits of being an owner of a broader enterprise, including a base salary, profit distributions and a more robust support team that can fully support a succession plan and a continuity plan. Then, upon retirement, they merely cash in their equity to complete the sale.  

3. Obtain A Formal Third-Party Valuation

Only an impartial and experienced professional can provide an accurate valuation. Online tools that seek to offer the same service are helpful but not nearly thorough enough. Though it may seem like overkill, advisors who are less than five years from retirement should obtain annual valuations. Among other things, this will help them focus their energies on how to best sustain and grow revenues, as well as to make clear the factors that are driving the most value within the business, forcing them to look at themselves from a buyer’s perspective. 

4. Understand The Impact Of Terms And Taxes On Value

Anytime a significant amount of money transfers hands there can be outsized tax implications, and the sale of a financial advisor’s business is no different. Most book owners, depending on their legal ownership structure (e.g. sole proprietor), can arrange terms that allow them to claim sale proceeds as a capital gain versus ordinary income, potentially resulting in enormous tax savings. The devil is in the details, of course, but the important thing to know is that sellers have options to maximize tax efficiency—which is often a bigger consideration than who is offering the most money on paper.

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