Tips for Advisors Who Retire and Sell Their Practice

If you are a financial advisor or financial planner who intends to retire in the next decade, you are not alone. According to the Certified Financial Planner Board, about 47% of its members are over the age of 50, meaning that many of these advisors are likely hoping to retire within the next two decades.

So what does this mean for you? It means you'll probably face some competition when you look to sell your business. It's not too early to start thinking about your business succession.

Given your responsibilities to your clients and the nature of the financial planning business, it's going to be a bit more complicated than selling a small business like a pizza shop. It could take years for a well-planned sale to happen.

Create Your Retirement Plan

Your obligations to your clients include picking a competent successor. If your clients do not trust the planner who will be taking over from you, they will probably leave. They may even leave before you sell if they feel like you are not adequately preparing for your own retirement.

That can decrease the value of your practice. Clients don't want to be caught off guard when it comes to the management of their finances.

To prevent this from happening, get a head start in planning for the transition.

First Question

Before you start looking for a buyer, you need to decide exactly what you want to do in retirement. Knowing the answer to these things will help you decide what type of sale to arrange for your practice.

Clearly, if you dream of moving to Maui, you need a clean break. Otherwise, you might consider a gradual transition or a segue to part-time hours, You could go for a lump-sum payment for the practice or arrange for payments over time.

2 Ways to Sell Your Practice

There are two main types of sales, internal and external. An internal sale means selecting a family member or employee who is ready and willing to take on the business. An external sale involves selling your business to another firm or an individual who has no connection to you personally or professionally.

Turning Over to a Junior Partner

With an internal sale, you may have to start planning even earlier. The new owner is most likely a junior partner, but will still need some training to run all aspects of the business.

You also need to be sure the business has the proper processes in place to run without you. Many business owners keep too much stored in their heads. Get your business processes down on paper.

You also need to ensure that all of your clients are comfortable with the soon-to-be owner. 

An internal sale is typically financed by the retiring owner as a loan and is implemented over an extended period of time. You can even structure the agreement as a form of pension, receiving payments after retiring.

Usually, the price is based on a multiple of the business earnings, with the succeeding owner keeping all existing infrastructure.

Selling to an Outsider

If you sell to an external buyer, there are various ways to handle the transaction and its timing. Many advisors choose a gradual transition, staying on for a time to ease the process for the new owner and for their clients.

You can sell the business but commit to staying on to oversee the transition for six to twelve months. You can also do a partial book sale, transferring only some of your clients and keeping others.

The gradual transition is typically done if you and the buyer are within the same broker-dealer network, if you are trying out a transition to see how it would work, or if you want to continue working part-time.

Another option is a merger with another company. You could stick around and receive a salary while someone else takes over the business management. 

An external sale is typically priced based on a trailing 12-month revenue valuation. These sales typically start with a down payment with the balance paid off over several years.

Other payment options include payments as a lump sum, a seller-financed note, or even an earn-out arrangement.

Finding the Right Buyer

If you are going to do an internal sale, you probably already know which employee is ready and able to take over. Assuming that the person wants to buy the practice, you're ready to come to an agreement on the price tag and other terms.

Finding an external buyer requires more research. You could hire a business broker to manage the process for you, or you can reach out to other local planners who might be interested. Over time, you can meet with some candidates and choose one who is the right fit for your clients, with respect to both personality and investing style.

In the case of a merger, you also need to consider whether a prospective new owner will be compatible with your current employees and business processes.

Finally, you can negotiate a deal, fill out the required paperwork, and get the sale done.

Managing the Transition

A key component of a smooth transition is continual communication with all interested parties including your clients, your staff, and the new owner.

It will help to write out the transition strategy and make it open to review and revision as necessary. When something happens that does not align with your initial plan, people need to know where they stand and how they will be taken care of.

The more you communicate, the less the risk of clients or personnel becoming disgruntled and leaving.

The Bottom Line

It is irresponsible to run a financial planning practice without a plan for how it will continue after you retire. First, sit down and decide what you want from retirement, then find a succession plan that will make your dream retirement a reality.

Make sure your plan includes ensuring quality service and advice for your clients after your departure.