In our last post, we explained the many personal reasons advisors use to delay selling. Advisors also cite assumptions about their practice value and earning potential as reasons for delaying selling. These assumptions are based on common myths advisors have about their practice value, and it could be costing advisors real equity.
Myth 1: My Practice Isn’t Worth Much Right Now
In our experience, most advisors underestimate the value of their practice. This is because they often rely on rule of thumb or other inaccurate methods of determining value. For many advisors who have been in practice for 20 years or more, their client value is likely at its peak, and will soon start declining, not gaining, in value. This is because client composition and the age of your client base is one of the most important factors influencing the value of your practice. It’s because of this, we recommend advisors get regular, formal valuations from a qualified third party. This way you know what your practice is really worth and can make smart decisions about the timing of your succession.
Myth 2: Its Better To Continue Making Income On My Practice
While most advisors underestimate the value of their practice, they often overestimate their income earning potential overtime. This is especially true when you consider the declining value of client assets due to an aging client base and rising expenses that can impact net income. Also, many advisors nearing retirement tend to slow down or stop marketing and growing their practice altogether. So instead of growing practice value and revenue, it soon slows and then declines.
The largest problem with these myths is that advisors are not treating their practice like an asset. For many advisors their practice is one of the largest, if not the largest, personal asset they have. Like all assets, you must weigh risk versus return and identify your risk on threshold. That is the point when the return from selling (monetizing equity) meets your portfolio requirements. If you continue holding on to your practice beyond that threshold, the value of your practice shows diminishing returns due to risk.
Overall, smart advisors don’t base their decision to sell on false assumptions. They base it on solid information. A detailed valuation from a qualified third party coupled with a true analysis of your practice as an asset and not just an income source will arm you with the data you need to make the right decision about your practice and your future.
