Building Long-Term Equity in Your Advisory Practice

Today you are running your own practice as an independent advisor and no doubt enjoying all of the benefits that entails – the freedom to be your own boss and serving your clients exactly how you want, on your own terms, for example.

Now fast forward a few years or maybe a decade or more. Inevitably, there will come a time when you want to step away from your day-to-day leadership role, whether it’s selling your practice, retiring, or just pursuing other things in your life. So what happens then, and what will your practice be worth? This is the $64,000 (and hopefully more) question that you can answer today by implementing strategies that will build equity in your firm.

To be sure, building enduring value is not an easy task, nor does it happen overnight and there is much to consider. Certainly you should be proud of all that you’ve accomplished when you choose to step away or retire, but what about the clients who have come to rely on your guidance? Will they be served long after you have left?

There is no better time than the present to think about how to build equity in your firm in your most productive years. For starters you want to measure the value of your firm today so that you can see measurable progress and growth in the years ahead. But how do you do that? In the past 20 years, valuation models have developed and matured and many are specifically tailored to independent advisors, taking into account not only AUM, but also the value of client relationships and wealth management practices.

Let’s focus on a few of the dynamics that advisors like you should consider in valuing their firms, and in turn, help you build equity.

Getting started: What’s it worth?

When valuing your practice, there are a great many other inputs to consider. For example:

• What is the revenue and cash flow that the practice generates, and what has it been over the last 5 years or more?
• What is your product mix and is it diversified? Does it provide a predictable, recurring revenue stream for a potential buyer of your practice?
• If you have categorized your clients, what percentage of revenue is coming from your top-tier clients? If only a handful of your clients are producing a large chunk of your revenue, this is a risky proposition for a potential buyer and for your firm in general, especially if any of those clients decide to leave.
• What is the average age of the top 10% of your revenue-producing clients? And the age of the rest of your clients? If they are all over age 70, then your practice could be a depreciating asset, which is not ideal when it comes to future valuation. You can build equity simply by increasing your client diversification, in terms of both revenue share and age bracket.
• Do you have a robust CRM that can be mined by age, product, and other demographics – and can you electronically transfer the book to a potential buyer? If not, then a buyer cannot readily assess the value of the practice or retain and market to your clients.
• Do you employ any long-term staff who are central to serving and retaining your clients who would go with the buyer for transition support?
• What marketing and client communication activities do you use to retain and create client relationships and how much are you spending on these programs?
• Is your business branded by your last name, and would clients be able to identify with someone new leading the firm?
• Do clients consider your firm a solo practice or an institutionalized practice that will endure beyond your exit?

When it comes to increasing equity in your practice and thereby increasing its potential value over the long term, consider this as a general checklist of things to address.

For more information and insights into how you can build enduring equity in your practice, contact us and Freedom Advisors professional will be happy to speak with you.

Freedom Advisors does not provide tax or legal advice.