Leave Your Practice by Design (Part 2)

When

Unlike your friends in corporate jobs, you can't just retire from your advisory practice. Instead, you need to set your retirement date and work toward that goal. But don't wait to start planning until you're emotionally ready to retire (or you have to sell because you are burned out or have health issues). But by then, it's too late because it takes years to prepare your firm to sell for the amount you need. You have to first grow transferable value. And if you want to sell it to your key employees or to your children, you need to get them prepared to step into your shoes. All these efforts require time and hard work.

How much

How much income do you need to support your desired lifestyle after you walk away from your advisory practice? How will you replace the income you used to earn from your firm? It's important to accurately and realistically quantify your retirement needs and wants, your resources (including the value of your firm), and any shortfall. Develop a detailed plan to bridge the gap. This will compel you to know the value of your firm and whether it can fully finance your retirement after you sell it. It will also tell you the minimum amount you'll be willing to accept from a buyer.

To whom

Who will be the successor-owner(s) of your advisory practice? Will it be your key employees? Your children? A third-party buyer? Do your key employees or your children have money to buy you out? (Hint: They almost never do.) If not, will you be able to come up with a creative arrangement to make it happen? Whatever the case, each succession option comes with its own set of advantages and disadvantages. You need to plan thoughtfully and with care (and several years in advance), so you can minimize the disadvantages to make your exit happen the way you envision it.

You are not important

After you gain clarity around when, for how much, and to whom to sell your advisory practice, the hard work begins. It's time to grow (accelerate!) transferable value of your business. What is transferable value? It is what your firm is worth to others without you.

A successful transfer can happen only if your advisory practice isn't dependent on you. Thus, you must grow your firm beyond your capabilities and change your role so it can function and grow without you. It's a lot harder and more time-consuming than you might realize because it requires a radical shift from business as usual.

Value drivers

Strong value drivers make your firm attractive to a prospective buyer. They contribute to healthy cash flows. A business with strong value drivers can demand a higher price than a business with the same EBITDA, but with average value drivers.

While not exhaustive, below is a list of primary value drivers:

• Strong, professional management team;
• Repeatable and standardized processes;
• Ability to scale without significant additional investment;
• Diversified client base;
• Demonstrated growth strategy;
• Recurring, sustainable and non-commoditized revenue;
• Healthy, growing cash flows that are sustainable, predictable, and transferable;
• Competitive advantage; and
• Strong financial controls and management.

It’s easy to see the time and effort required to get your advisory practice ready for sale. The time to start is now.

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]

Read more articles by Hoon Kang