Determining when to sell your financial services firm is a lot like determining whether it’s time to sell your house. You need to take into account what the market is doing, what buyers are looking for, and whether you’re ready to buy.
Unlike selling your house, you don’t normally replace your financial services firm with another firm after selling the one you built from the ground up. You put years and years into building your business.
To you, this business is so much more than just intellectual property. It’s a part of who you are.
How do you put a price on that?
Selling Your Financial Services Firm at Peak Value
Selling as your business nears its peak provides an opportunity for you to capitalize on that growth.
The hard part is knowing when your business is nearing its peak value.
Wait too long to sell, and you could see your business value decline from its peak.
Potential buyers are much more likely to buy (or at least strongly consider) a business that appears to be increasing in value over businesses that are decreasing in value or even stable.
But if you don’t wait long enough to sell, you could miss out on the revenue provided as your business continues to grow.
Ideally, you want to sell your business just before it reaches its peak value so you can get the most out of it while it’s continuing to grow, while still being able to demonstrate to potential buyers that the business is strong.
Are You Ready to Retire?
Many people are tempted to answer this question with their age, but age is just a number. One woman started her independent financial services firm in her 70s. Colonel Sanders was 65 when he incorporated Kentucky Fried Chicken and started selling franchises.
So, rather than first thinking about your age, think instead about how you feel when you get up in the morning. Do you get up excited to go to work and help your clients? Or would you rather put your feet up and spend some time reading, watching TV, putting together puzzles, playing golf, or traveling the world?
Building a business is exciting, but it can also be exhausting. Only you can know if it’s time for you to step aside.
How Old Are Your Clients?
The age you should be thinking about is the average age of your clients. If your book of business is made up primarily of older investors who are no longer accumulating assets and you’re not replacing them with younger investors, that will make your business harder to sell because that will signal that the value of your business is (or soon will be) decreasing, rather than increasing.
Potential buyers look at this kind of information to help them make their decisions.
Ready to Sell, But Not Ready to Retire?
One option is to negotiate (or have someone negotiate on your behalf) a “sell-and-stay” or “sell-and-service” model in which you sell the business, but stay on to continue working in the business. This allows you to monetize now and retire later.
Just be sure to think about how involved you want to be in the business after selling, and for how long. Do you want to be a full-time salaried employee? Or do you want to work part time as a consultant? Whatever you choose, make sure those details are written into the contract when selling your business so everyone knows what to expect.
Distributed Leadership
If your clients all have a relationship with you, and you are the only one making strategic business decisions for your financial services firm, that makes your firm less attractive to buyers because that means you are the business. When that’s the case, it makes it much harder for anyone else to get the same results from your business if you’re not around to keep it going.
By contrast, having a leadership team that shares responsibility for making strategic decisions for the business makes it much more attractive to potential buyers because that shows there’s value in the firm, and not just one person.
Tax Implications from Selling Your Financial Services Firm
The income you earn from your business each year gets taxed at the regular income tax rate. Income from the sale of your business is taxed at the capital gains tax rate, which is much lower.
Selling Decisions Require Data
As a financial advisor, you know the importance of gathering data before making any big financial decisions. There are few financial decisions bigger than selling the source of your livelihood, so gather as much data as possible before making any decisions.
Some data points to consider include:
- What is the market doing?
- What are interest rates doing?
- What is your business worth now?
- What will your business be worth next year? Five years from now?
Have You Considered the Affiliation Model?
For those who are not yet ready to retire, but want some of the benefits of being part of a large financial firm without giving up the benefits of being an independent financial service provider, there’s the affiliation model.
The affiliation model is how Vertex partners with independent financial advisors to offer both them and our clients the best of both worlds: the freedom and flexibility of a small business with the support and resources of a large firm.
The benefits of our affiliation model are listed and defined more clearly here.
