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.

5. Have A Continuity Plan

Successfully executing an exit plan should be a joyous event for any advisor, but sometimes life intervenes. That’s why advisors need a separate continuity plan that protects their family and clients in the event of the advisor’s sudden death or disability. For large, well-resourced firms, this is not as big an issue as it is for smaller-sized practice and book owners. In any event, advisors should be proactive and find a viable solution on their terms, such as a formal merger. Otherwise, their broker-dealer could take over and sell the practice on theirs, likely for a fraction of what it’s worth.

6. Sell On The Way Up!

Obviously, the best time to sell any business is when it has reached its peak value. The problem for many prospective sellers is that they don’t have the ability to determine exactly when that is without the help of an impartial third-party expert. As a result, they wait too long, allowing inertia to set in, which for senior advisors can spark an irreversible decline in their business. One way to possibly avoid inertia? Consider both the trajectory of annual gross revenues over a five-year period, along with the net number of new client relationships that have been established over the most recent 12-month cycle. Once those metrics level off, it’s probably time to sell.

It’s likely that much of the above raises more questions than answers—and that is exactly the point, because it’s important to elevate these issues now while there is still plenty of time to address them and come up with solutions. The vast majority of successful independent advisors nearing retirement age will have only one opportunity to maximize the value of their business in the form of a sale—you owe it to your clients, your family and yourself to do it correctly.

David Grau Sr., J.D., is the president and founder of FP Transitions, which partners with independent advisors to build businesses of enduring and transferable value. The above is adapted and excerpted from his second book, Buying, Selling, & Valuing Financial Practices: The FP Transitions M&A Guide published by John Wiley & Sons in August 2016.