I’m with FP Transitions. I’ve done a variety of different consulting activities, working directly with financial advisors as they understand their business value, review their business benchmarking and determine the important KPIs for themselves and their business. They work with us to figure out what the best strategy is for their firm. I’m one of those people who has the infuriating answer whenever folks call up and ask for advice. And often my response is “It depends on where you are in your career. It depends on what your long-term goals are for the business.”

How do you look at your business and make those decisions that are going to get you where you want to be long term? We often ask our clients, “Why do you want to make this decision today? How does it inform and impact your decisions for your long-term succession strategy? Is your strategy and your decision today aligned with the outcomes that you want to have tomorrow?” It’s very similar to the process you go through with your clients. Why do they want to invest in a certain product? Why do they want to purchase a certain insurance line? Why are they making the decisions that they are making today? Do they inform their long-term strategy? Advisors come to us so that we can help them make those decisions and support their long-term strategies.

What can you do to support your long-term goals? Do you want to remain as a practice, or do you want to recognize the traits of your practice and transition it into becoming a firm, into being an enduring business? What do we consider a practice? Those are typically firms with gross revenue resources of about a half million dollars to start with. We could go above and beyond that. But what we notice with that baseline of revenue resources is that a practice can provide a solid income for the principal owner. And you often have the desire to enjoy some of that income. You want to be able to spend time out of the office.

Practice owners will often have assistance: a paraplanner — you will have somebody there within the team who is available to answer client calls if you are speaking to another client. You can accept referrals from your clients or from other practitioners because you’ve got somebody who is there to help you out. You have enough revenue coming into the practice that you can cover a paraplanner’s salary. There’s not usually an additional professional when we are talking about practices. And when there is an additional professional, the compensation structure is “eat what you kill.” So you are not, as a practice owner, paying for your additional professional staff through your own revenues. You have more of a revenue-sharing agreement where they receive 70 percent of whatever they produce, whether it’s fees or trails or commissions. The primary owner might collect 30 percent by offering the platform.

The operational people are generally going to be covered through the gross revenue, but when you do start to commingle those other producers, they’re generally off on an “eat what you kill” kind of a model.

The distinction as we get into sustainable firms is that we see practice owners at about a quarter of the industry. Practice owners are often at a tipping point. Do they continue to operate this practice and have the independence and the flexibility and recognize the limitations of owning a practice? Or do they invest in the changes that are necessary to convert it into a sustainable firm?

When we are talking about building value, creating a business of transferable value or acquiring a book or a practice, there are certain things that you want to look for. When we get technical in our valuation, we talk about transition risk, cash flow quality and marketplace demand. But what that comes down to simply is, do you have sticky relationships? Are your clients going to remain with a seller after you’ve sold your business?

The industry has embraced recurring revenue fees, trails, that kind of income over the last 15 years. It’s been a significant change from the commissions that advisors were collecting exclusively 20 years ago. We’ve worked on a couple of projects with the insurance producers where the sticky relationships and the transferable recurring revenue is a very important component.

As you’re focusing on a smaller group, the low overhead that you’ve got as a practice owner also makes you highly attractive to a potential acquirer. Because if you’ve got sticky relationships, you’ve got recurring revenue. And once you take the principal advisor out of the business, you reduce the largest economic burden, the owner’s compensation. Then an acquirer will pay a premium to purchase your practice and take your $500,000 revenue and fold it into their business. They will get the economies of scale, they will get their ROI, and you get the value for the business that you’ve built.

As you are working with practice owners, ensuring that you are creating an efficient model is important, but when you sell the business, you have to retire with it. That’s where your buyer gets maximum value. That’s where you as a seller get maximum value. So when we talk about the limitations of building a practice, you need to know at the end of your career, there’s not a gradual transition there for you. There is a wealth event that you want to be able to capture.

When we issue a valuation report, we break down our analysis into your transition risk, your cash flow quality and your marketplace demand. Each of these three components sort of carves out elements of those matrices. We’re often looking at the client demographics: the age of the clients and if you’re engaged in multigenerational planning. When we look at the structure between you and any related practitioners, do you have control over that relationship based on the contract? So, if you are a practice owner but you are fairly absentee, and you have a paraplanner or a practitioner who has a revenue-sharing arrangement with you, a lot of advisors will include that revenue in their valuation, but they don’t have control over that client relationship because of the contract that’s in place, so that will hinder your transition risk.

On an annual basis, or maybe every two years, you need to go through this process of continuity planning, valuation, benchmarking, and consider if you still want to sell your business at the end. At a bare minimum, continuity planning ensures that your clients have somebody they can go to if something happens to you. As a practice owner with a single professional in the business, you need to provide that safety net for your clients.

Evaluation gives you a lot of very important information on your practice. Your benchmarking lets you see what you are doing well. As you set your strategic plan each year, the benchmarking is going to help you highlight those KPIs you need to invest in to grow your business the way that you want. So benchmarking informs your long-term strategy year by year.