Reality usually bites when students graduate from college, begin their careers and realize they're not going to make as much money as quickly as they expected.
For owners of financial advisory firms, reality often bites as they prepare to end their careers and seek to sell their businesses. As reported in
InvestmentNews last week, advisers aren't going to get as much for their firm as they imagine.
Buyers paid about 2.2 times average revenue in 2014, while sellers sought 2.8 times revenue, according to Cerulli Associates — despite the facts that demand outstrips the supply of such firms and interest rates are low. The latter means firms' present value of future cash flow is high, which suggests prices should be high.
In fact, if interest rates rise and more boomer advisers seek to retire — increasing the supply of available firms — prices most likely will drop even further.
A couple of implications arise from these data.
First, advisers planning to sell their firm should lower their expectations and, perhaps, adjust their retirement plans. Their nest egg probably will be smaller than they had anticipated.
Second, they should do everything in their power to enhance the value of the firm not only by building solid, enduring relationships with each of their clients but also by ensuring that the firm's other advisers also have strong bonds with clients.
An owner with vigorous relationships across the board can sleep better at night, knowing that neither clients nor fellow advisers will be inclined to leave during the transition, when new owners take over or the firm is merged into an acquirer's practice.
Third, advisers looking to sell their firm must have sound technology and up-to-date relationship management software, to facilitate the new owners' taking over those relationships.
They also need audited financial records so that prospective buyers can easily see profitability and be able to
trust those figures.
In short, owners of financial firms who want to sell must do their homework and put in the difficult effort to prepare for sale. They will find that most of the steps in the process also will enhance the business' operations and success.
The steps might not lift the value of their firm to the level of their expectations, but they will maximize the value.
