It’s a Question of Value
- Created: Saturday, 08 May 2010 21:08
- Written by David Grau Sr., JD
In my experience, this industry, at least this first generation of retiring advisors, is unique in at least one key aspect – today’s advisors who are 60+ years of age will not sell their practices to younger, stronger, larger advisors or advisory firms. In fact, most of these advisors won’t ever sell. “Retirees” in this industry today continue to work, albeit on a reduced scale of effort, efficiency, and growth. Production begins to decline as early as age 50 until, ten to twenty years later, most advisors’ practices actually begin to contract and, upon the advisor’s retirement, death, or disability, disintegrate completely, at which time it is a "fire sale."
So enough with the problems and challenges – let’s talk solutions. I believe in and practice a special form of succession planning called "equity management." Equity management focuses on helping advisory practice owners determine, monitor, protect, and realize the value of their life’s work. To be effective, it needs to begin earlier in an advisor’s career – just as with your clients planning for retirement, it takes time. But the entire process is devoted to helping you build a business of enduring and transferable value – to provide you with options and control at every point of your career.
The equity management process begins with valuation. Financial advisors can attest that it is not possible to manage an asset unless they know its current value and have an understanding of its potential future value. For that reason, the entire equity management process revolves around determining and monitoring the value of a practice, and helping owners understand the unique value drivers of an advisory business.
A formal, professional valuation is an essential business building tool, whether you’re a one-person practice or a firm with ten owners. Too many people think valuations are to be performed only on the eve of retirement, or that practice value can be determined by multiplying trailing 12 months, gross revenue by a factor of 2. To follow this logic means accepting that a practice with one owner, run from an executive suite with no formal staff is worth the same multiple of value as a firm with a complete infrastructure and double-digit growth rates over the past 20 years – nonsense.
But way too many smart financial advisors take the simple way out, and guess at their value based on hearsay, rumors, and stories told by others. For that reason, I am going to devote some quality time in my next couple of blog postings to sharing with you what I know about practice value and the valuation process.
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