6 Questions to Ask Yourself Before You Sell Your Advisory Firm

What You Need to Know

A standard formula to value a company is 2½ or three times recurring revenue, and one-time nonrecurring assets.
Learning new technology will likely be a major part of this transition.
You should weigh your business partner’s and significant other’s thoughts regarding the sale.

There are two things that are usually true about transitions: They are not easy, and they never go off without a hitch. And like a round of golf, you need to be ready to scramble, since things often don’t go the way you planned. Selling your advisory practice is one of the biggest transitions you may ever make in your career — but for me, it was also one of the best decisions of my life. 

The sale of my practice was 20 years and six weeks in the making, and though there were hurdles to overcome, I couldn’t have asked for a better outcome. Below are six questions I encourage any advisor to ask themselves before they start the sale process. 

1. What is my practice worth, and how will it be valued?

Your practice’s value is based on its size and profitability. A one-person shop is valued far differently than a self-sufficient business with employees and systems in place. Typically, an advisory practice is valued based either on revenue or EBITDA (earnings before interest, taxes, depreciation and amortization). 

A standard formula to use to value your company is 2½ or three times recurring revenue, and one-time nonrecurring assets. Larger RIA firms and other acquirers typically value firms based on EBITDA, and the valuation multiples vary greatly based on the talent and leadership, growth performance, geography, client base, and any “secret sauce” the firm is bringing to the table. 

2. Is the purchasing firm and service advisor a good fit for my clients and my staff?

This one is key. Being from the South, I felt it was important to merge with a firm that also had Southern values. Because I was also focused on building a company and team to last for generations, I wanted to ensure that my clients and my staff would be well taken care of after my departure. Both clients and employees will stick around if they feel like there’s something in it for them. 

Employees want to feel like they have a clear career path, opportunities for growth and mentors to learn from. Clients want to understand how the transition affects them and what the benefits are. They’ll want to make sure that they are not being left in the lurch, that they gel with their new advisor, or their existing team is staying intact. When interviewing prospective buyers, make sure you understand their growth objectives, how they plan to achieve them, who the key players are, and what their endgame is. 

3. What new systems, practices and technologies will my team and I be learning?

A large part of our transition was learning new technology. Prior to the acquisition, our firm used Redtail as our CRM, but Merit uses Salesforce. So, with Merit’s help and guidance, we transitioned all our files over and learned how to use a new platform. Merit also provided us with hands-on support, in addition to multiple team and one-on-one training, which made the process incredibly seamless. 

It’s critical to ask not only what systems the acquiring firm uses, but also how they plan to get you and your team up to speed. Make sure to understand what type of transition team is in place so you can also get access to a superior level of support.