Over the last five years, the demand for practice acquisitions has skyrocketed. This increase in demand is fueled by greater access to capital, a growing number of educational and professional resources for advisory M&A, and an appetite for growth. Even with rising interest rates, demand remains high. However, the supply of practices available to purchase has not increased at the same rate of demand. This is despite practice multiples and selling price reaching an all-time high (averaging 2.5x and $3 million, respectively).
Recently, our team of succession experts gathered to discuss this phenomenon, especially the still relatively small number of practices for sale. Our experts homed in on the three most common reasons they hear advisors provide for selling their practice. Here they are in order from most common to least common.
#1 Reason – Burnout
The most common reason, especially in recent years, is that advisors are simply burnt out. Rapidly changing technology requirements and client expectations are making it difficult for some advisors to keep up. That coupled with a pandemic and market volatility have left many advisors with little fuel in the tank to keep their career and practice growing. Selling under these circumstances can lead to less-than-ideal outcomes unless advisors leverage a third-party succession planning expert to guide them. Burnout and stress can cloud an advisor’s judgement, leading them to rush to select a buyer without doing due diligence. They also often fail to communicate their succession plans to clients and staff, which can negatively impact the success of the practice’s transition to the new advisor.
#2 Reason – Life Event
Just Like their clients, advisors are not immune to unforeseen events such as death, illness, or disability. An unexpected life event can force an advisor and their heirs into a “fire sale” situation. A lack of continuity planning for such events creates a chaotic and difficult situation on top of what is already a challenging time for the advisor and their family. No advisor wants to be forced to sell due to circumstances outside their control. However, working with a continuity and succession planning expert can help the advisor influence the outcomes of such a situation, especially as it relates to monetizing practice equity and taking care of the needs of the advisor, their family, clients, and staff.
#3 Reason – Planned Retirement
Surprisingly, the least common reason advisors give for selling their practice is planned retirement. As mentioned earlier, despite building a career helping their clients plan for the unexpected and guiding them to retirement, advisors are not applying that same advice to their own future. Industry wide, less than a third of advisors have a continuity plan in place and even less have a clearly defined vision for their retirement. Many advisors hold on to the “five-year myth,” believing that retirement is some place far off in the distance. This soon becomes a shifting target that advisors never truly identify or plan for. This lack of planning motivates many advisors to hold on to their practice longer, which negatively impacts their practice value and chances of finding a quality buyer who will pay top dollar for their decades of hard work.
Overall, we’ve seen that the impetus for most practice sales comes because of outside forces and not due to thoughtful planning and decisions made by the advisor. For an industry built around the concept of planning and managing assets, advisors are doing a poor job of planning for their own future and managing one of the biggest assets they own – their practice. Smart advisors will buck this trend and start planning for their own future now. Even if an advisor doesn’t plan to sell for years, having a continuity plan in place and working with a succession planning expert throughout their career will ensure that advisors remain in control of their future. More importantly, they will control how and when the sale of their practice occurs and ensure that they achieve the outcomes they desire.