When's the perfect time to exit the business?

The magic age at which an adviser should exit the business is 59, according to a succession planning expert. By 59, an adviser's maximum annual growth rate has peaked and is coming down, David Grau, founder and president of FP Transitions, said at the Financial Services Institute adviser conference in Washington today. "By that time, we're not working so hard any more, and if you're going to get out, that's the time to do it," he said. The peak annual growth rate occurs for advisers between 45 and 55, said Mr. Grau, whose company completed business valuations for about 1,000 firms last year. The average value of firms was between $1.4 million and $1.5 million. Advisers looking for the greatest payout for their businesses should develop a team of internal investors that take over the business slowly, he said. Founding advisers ultimately can generate about six to seven times the firm's gross revenue, compared with an average of two times last year's earnings for advisers who sell their businesses, he said. "The best value is internal, not external succession," Mr. Grau said. "The key is building a practice that takes care of you until you don't want to work any more." Advisers should establish incentives for key employees to invest in the company through a portion of profit distributions. That way, the next generation is buying out the owner over time while still earning a salary that pays their bills, Mr. Grau said. This creates a team of professionals to take over the firm from the founding adviser. Typically, younger planning professionals don't want to put out their own shingle, in part because they don't want to work 60 hours or more a week — the way they've seen founding advisers do over the years. Younger professionals at advisory firms have been receptive to the idea of ownership through a portion of profit distributions about 80% of the time when approached with this concept, which admittedly will require them to sign promissory notes of at least 10 years' duration, Mr. Grau said. Advisers should start thinking about their plan for succession when they are about 50 because it takes years to get the business and operational structures in place, he said.