How Expenses Can Impact the Sale of Your Financial Advisory Practice

Many factors impact the sale of a financial advisor practice. Valuations influence the market value and ultimate sale price. The pool of ready buyers and finding a buyer who is a good fit impact both who will take over the reins as well as how. There are also a number of factors that influence the timing of the sale, such as your personal goals, the state of the market, and readiness of a successor. One often overlooked factor that can impact both the timing and the value of your practice is your expenses.

First, expenses can impact the sale of your financial practice if those expenses are tied to contracts or other service agreements. Often times these contracts have term limits and clauses that impact the transfer of the obligation and/or impose penalties for early termination and transfer. Even if there are no penalties to transfer, or if a term of service is nearly complete, a buyer may have different expectations for expenses or have their own service providers. This is why we list “Record All Business Services” as step nine in our “10 Steps to Prepare to Sell Your Practice.” Any contracts that can’t be easily terminated or transferred can delay the timing of your sale as well as impact negotiations. Creating a list of what contracts you have in play, the terms, and the service providers can help you evaluate the timing and some of the conditions that can impact your transition.

Second, expenses impact your sale by impacting the value of your practice. The value of your practice is developed by combining the results of two practice valuation methods. The first method, known as the market approach, looks primarily at your client mix and AUM. The second approach, known as the income approach, looks at the operations of the practice and its overall financial health to determine the profitability of the practice. Expenses directly impact the profitability, and therefore value, of a practice. If you want to maximize your practice value, one of the methods to improve the drivers of value is to reduce your expenses and increase your operational efficiency.

If you are considering selling your practice in the next one to five years, it’s important to start early and prepare your practice for sale well in advance of the actual transaction. It takes time to evaluate and reduce expenses, as well as to move through the other “10 Steps to Prepare to Sell Your Practice.” So be sure to give yourself enough leeway to gather that information and make those changes.