Financial advisors who are selling a financial planning firm face a number of challenges, including finding the right buyer, getting fair compensation, and guiding a smooth transition. Advisors can help their own cause by having their documentation in order.

Organized and complete documentation can accelerate a sale in a few ways. First, it gives a potential buyer a full view into the firm’s operations and profitability. The buyer can then enter into the purchase with confidence and may be less reluctant to pay top dollar. Complete documentation also gives the selling advisor more leverage at the negotiating table because there is no ambiguity surrounding the firm’s financial strength. Finally, fully prepared documentation can help the buyer obtain financing because the firm’s financial and operational details have been fully disclosed.

Although there are numerous documents that a buyer or lender may want to see, there are three specific areas that will be of greater importance. Documentation in these areas will answer nearly every question a buyer or lender may have about a firm’s financial viability.

  1. Tax returns. A lender will want up to four years of the firm’s tax returns before approving financing to the buyer. The tax returns provide a great deal of information, but they can also serve to verify revenue and expense numbers. Four years of returns will also provide insight into whether the firm’s revenues are increasing or declining.
  2. Client demographics. Buyers and lenders will both interested in how many clients a firm has and the clients’ ages. A diverse firm with assets distributed across a wide range of clients may be viewed as more favorable than a firm whose assets are centralized around a handful of clients. Some clients don’t stay with a firm through a change in ownership. Lenders and buyers could be wary if the loss of a single large client would mean losing a significant portion of the firm’s assets. Buyers and lenders are also interested in clients’ ages. Clients that are diverse in age are viewed in a more positive light than a book of older clientele. Older clients are more likely to be invested conservatively and to withdraw their assets, making future growth difficult. On the other hand, younger clients are still contributing to their assets and are likely to be invested in a way that facilitates growth. An advisor who can document that his or her practice is age-diverse may be in position to command a premium purchase price.
  3. Fee-based revenue vs. Commission-based revenue. The industry has shifted to fee-based planning and investment management. This idea is critical when selling a financial planning firm. A book of business may be less appealing to a buyer if the revenue for those assets was already paid out in the form of front-end commissions. The buyer would then be forced to put those clients into new commission-based investments or to transition them into a fee-based structure. A book made up of primarily fee-based accounts, however, could be very appealing to both a buyer and lender. Since the fee-based revenue is ongoing, the buyer and lender could make reasonable projections as to how much revenue the buyer would receive after taking ownership of the firm.

Selling a financial planning firm is challenging, but it can be less so if the seller is prepared. Documentation is critical component of the sales process. The buyer and lender both want to know the financial strength of the firm. By helping them gain insight into the firm, a selling financial advisor can help himself or herself get the highest possible amount for their practice.

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