To avoid frustrations and ensure success, it’s essential to invest time to identify and manage expectations and structure an agreement.Andrey Popov/iStockPhoto / Getty Images
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Most guidance on the sale of a book of business is often from the buyer’s perspective, such as how to find a practice that’s being sold and what price you should pay for it. However, more conversations are happening now with advisors about selling their practices and their succession strategy.
For most advisors, their practice is their biggest investment and holds tremendous unrealized value. Like many small business owners, figuring out how to transition the business and maximize its value is essential to achieve their lifestyle and retirement goals.
Some have an internal succession plan in place with family or close associates. For those who don’t, the sale of their practice is a more complex matter and can generate significant stress. In developing a succession plan, there are two factors advisors think about most when evaluating their options.
How do I find a good landing spot for my clients – many of whom are friends, family, and long-term relationships? And how do I maximize the price of my sale? While the latter is often top of mind for many advisors, in almost all cases, advisors achieve their price goals. That’s why focusing on their strategic objectives for themselves and their clients is more important.
As such, advisors going through this process need to make a couple of key decisions. The first is whether the sale will be a true exit point or whether they want to stay involved with the business. Leaving allows them to move on quickly to new priorities. The buyer takes over the clients and assets and simply pays for the value of the book that transitions.
The second option is more complex. That’s what we would call a “sell and serve” strategy – sell a practice to another advisor and continue to remain involved in it, serving clients. This alternative addresses three situations:
- An advisor who wants to continue focusing on delivering great advice to clients but no longer wants to focus on day-to-day operations.
- An advisor who wants a reduced role (and more personal time) but wants to remain involved with a select number of clients.
- An advisor who has identified a successor, but that successor needs support from both a client and operational perspective as they mature in experience.
In all these circumstances, a sell-and-serve strategy is an attractive option to help sellers achieve their goals and capture some of the benefits of growing the practice. However, to avoid frustrations and ensure success, it’s essential to invest time to identify and manage expectations and structure an agreement.
To get it right, the seller will want to manage trade-offs and understand how the new agreement will be different from their legacy arrangement. The most noticeable transition will be in compensation. As a non-owner employee – the seller will be taking reduced compensation. That’s the cost for increased flexibility and reduced risk.
More important, they will also need to accept that they’re no longer the last voice in decision-making. Someone else – the new owner – will set the vision and make decisions about the practice value proposition and operations. For some sellers, this is difficult to accept and may not be the right strategy. However, if it is, then they want to think through the structure and incentives of an agreement.
The agreement will include consideration for giving up ownership control (and ownership income). The seller will want to evaluate whether they get additional performance incentives for retention, growth, or other factors such as client satisfaction.
Most important, the seller should have an open and direct conversation with the new owner about how they will work together. Five areas that can cause the most friction and are important to prioritize in setting expectations for the ongoing partnership are:
- Service model and client experience. Does the buyer have a vision for a value proposition with which the seller is aligned? It may be different than how the seller operates; will they be comfortable serving clients in this manner?
- Fee structure. What are the buyer’s expectations on pricing and is the seller comfortable that it’s appropriate for their clients?
- Investment philosophy. How does the buyer manage investments and how would the seller’s clients transition their portfolios? Does the seller agree with the approach? Can they defend it to their clients?
- Technology. Does the buyer operate a modern, efficient tech stack? Does it enable a simple and engaging client experience? If the seller’s goal is to step back and the platform is difficult/complex to use, they will be frustrated with the result.
- Culture and alignment. What is the culture of the buyer’s team and how do its members interact? The seller will need to spend a significant amount of time getting to know the people on the team and how they interact. Making sure the fit is right is essential to their happiness.
For advisors, moving on from their biggest investment, personal livelihood and the relationships built with clients over many years is a major decision from a personal and business perspective.
Thinking through objectives and goals while discussing them with the new firm will ensure the seller achieves an experience most aligned with their situation. Spending time to capture goals and putting questions together so they can interview buyers properly to ensure a match beyond the dollars can take some extra time. However, it’s key to ensure their long-term happiness.
Jeff Gans is chief executive officer and managing partner of Purpose Advisor Solutions in Toronto.
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