You can't always get what you want

It is not uncommon to place a high value on possessions we hold near and dear to us: a cherished coin collection, a vintage automobile, even the house we've lived in for 25 years, where we've raised our children. And that's why it is often a rude awakening when we find out the rest of the world does not appreciate those things as much as we do, and is not willing to pay the price we believe these objects are worth. Cerulli Associates Inc. recently came out with a report on advisory firm prices and found that advisers have an inflated view of what their practices are worth. While the market is currently valuing them at 2.2 times annual revenue, advisers estimate their firms are worth 2.8 times revenue.

A BIG DIFFERENCE

The difference is not inconsequential. Consider an owner with a practice generating $2 million in annual revenue. Based on the study, the owner believes it should bring in $5.6 million, while a buyer may not be willing to pay more than $4.4 million — a $1.2 million differential. It is easy to see why an owner may expect a higher price than the market commands. Part of it is emotional. The practice is something the owner built from the ground up, that he or she has poured his heart and soul into and spent untold hours nurturing. But the market is cold and calculating; it is not sentimental. Buyers are looking to pay as little as possible for your prized possession. Take it or leave it. This is true even though the number of advisers who say they are interested in buying a practice is far greater than the number who say they want to sell. But this so-called seller's market isn't translating into drastically higher prices. Buyers are biding their time and apparently are willing to wait for the right deal. Fortunately, there are things advisers can do to groom their business to make it attractive to a buyer — and to ensure that it will fetch the highest price possible. First, plan ahead and give yourself enough time. An adviser who decides in January that she wants to unload her practice by June is not going to have the time she needs to make necessary changes. A more reasonable lead time is three to five years. Start the process by looking at your books. As in any business, buyers will be looking for revenue and profit trends that are climbing. A business that has plateaued or is in decline will not be an attractive acquisition candidate.

BUILDING UP ASSETS

Buyers also want practices with clients who vary in age and who have considerable assets. A practice top-heavy with older clients will be harder to sell because the clients are drawing down assets rather than building them up. Sellers also should be able to show buyers that they have established ways to get new clients, such as a vibrant referral system and through building multigenerational relationships with existing clients. Owners also should let any prospective buyers know they plan to stay around after the sale to transition clients. Cerulli reports that client transition is the top challenge in any acquisition. “It is critical to enlist post-sale support from the seller for approximately six months after the closing,” the report said. Even if you follow these tips, there are no guarantees your practice will attract the high multiple you think it deserves. But at least you'll know that you've done everything you can to maximize the value of your business.