Leave Your Practice by Design (Part 1)

​My success in that role led me to a project with another firm, and then another, and so on. Thus began my life as an accidental practice management consultant.

What buyers want

At first, with no prior experience running a business and no one guiding me, I identified how I could maximize my effectiveness in the shortest amount of time possible to help my friend-turned-client.

I decided to approach the project from the perspective of an imaginary buyer. I asked myself, "If I were a potential buyer of this practice, what would make it so attractive and hard to pass up that I would willingly risk my hard-earned money and even take out a humongous loan to buy it?"

I concluded that, as a buyer, I'd look for a turn-key business that's set up to generate healthy cash flows – sustainable, predictable, and transferable – year in and year out, long after its owner has moved on. (I would learn later that this is called "transferable value" – that is, what a business is worth to others without the owner.)

A saleable business is a healthy business, and a healthy business is a saleable business. To sell a business at a premium, it has to be a healthy business. And if a business is healthy it can sell at a premium.

Reality sets in

With that in mind, I rolled up my sleeves and got to work.   But soon, a worrying pattern emerged. While each firm I worked with was unique, profitable, and successful, every single one was far too dependent on its owner (also the founder) who acted as its CEO, CFO, COO, relationship manager, rainmaker, HR manager, marketing director, client event coordinator, bookkeeper….

You get the drift.

If the owner were to suddenly disappear – voluntarily or involuntarily – the firm would decline rapidly and may even collapse because no one was trained or equipped to step up and into the owner's shoes and keep it afloat, much less grow it.

In short, while these firms were profitable and had the appearance of success, there was no transferable value to speak of because they were too dependent on their owners. Let that sink in for a moment. They all owned fabulously successful and profitable – but worthless! – businesses.

Getting more for your business

This observation led me to develop and implement a system that would give them the best chance to generate healthy cash flows – sustainable, predictable, and transferable – designed to minimize dependence on the owner.

Of course, it was easier said than done.

It entailed implementing a strategic plan with discipline instead of operating at the whim of the owner, developing a firm-wide growth strategy rather than depending on the owner’s rainmaking skills, documenting business and operational processes and having everyone (including the owner) follow them, managing business risks, tightening up legal documents, formalizing financial controls, and so on.

Sounds simple enough, right?

But it was hard work – really hard and time-consuming. I remember a particularly challenging and time-sensitive project where the owner of the firm was facing health issues. With revenue rapidly dropping and clients leaving by the week – not to mention declining employee morale – we had to act fast and reverse course. When the dust finally settled, I somehow managed to increase the value of the firm four-fold (400%) and sell it at a price that would have seemed outrageously optimistic and unrealistic when I started the project just one year prior. The most memorable compliment I received from the owner was, “Where were you five years ago?”

Lessons learned

My days as an accidental practice management consultant are behind me. I'm now back to being a financial advisor full time, but I still think about the many things I learned from working with these advisory practice owners. Two lessons in particular stand out:

1. For an owner of an advisory practice, their business is often the most valuable asset they own.
2. It takes several years of enormous effort to get an advisory practice ready for sale for maximum price.

Be intentional about working on your business, not just in it. In addition to your daily tasks, be disciplined about setting aside time and effort regularly to grow and protect the value of your advisory practice. Eventually, every business owner is faced with the reality that they have to leave their business – because of age, health, loss of passion, or a spouse who wants and needs you to spend precious retirement years with them. You don’t have other assets to fall back on. You should – you must – sell it for maximum price to get maximum financial independence.

Additionally, don't underestimate the time and effort it takes to get your business ready to sell for the maximum price. It doesn’t happen naturally. You cannot go on business as usual and expect your business to be ready for sale. It requires a radical change on your part because buyers want a turn-key business – a firm that can function and grow without you. Ask yourself; Does your business run without you? Can it? My guess? Probably not. It takes work – real hard work – to get your advisory practice ready for sale. Realistically, think five years.

In my next article, I will discuss three questions you must address to gain clarity on exiting your advisory practice by design.

Hoon Kang, CPA, AEP, ChFC, CLU, CFP® is partner and financial advisor with Cultivant LLC. He spent several years as an accidental consultant to RIAs helping founder-centric advisory firms transform from practices to enduring businesses with transferable values. His articles have appeared on AICPA PFP Planner, Leimberg Information Services, Journal of Financial Service Professionals, and Advisor Perspectives. He can be reached at [email protected]

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