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Building a firm for sale

Liz DeCarlo

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6 ways to increase the value of your business before you consider selling.

The best time to consider increasing the value of your business is long before you’re ever ready to sell it. “Starting early is the best thing you can do,” said Brian D. Heckert, CLU, ChFC. “By 55, you should have a transition plan in place. Otherwise, at a certain point in time, the business will hit a cliff and diminish.

“The owners who receive the most value are selling a functioning firm, while the owners who are simply selling a list of clients receive the least value,” said Heckert, a 31-year member from Nashville, Illinois, who served as MDRT President in 2016. To ensure your business rates at top value, Heckert recommends starting with these key points.

Determine your value and make sure your financials are true financials. For the maximum value, itemize your expenses and clean up your books, Heckert said. Reduce your overhead and expenses as much as possible. Aim for three years of true financials before you consider selling.

Know the difference between your net and gross. Look at your assets under management and recurring revenue. The age of your clients factors into valuing your firm’s growth potential as well.

“If there’s no relationship with the children of clients, there’s no value,” Heckert said.

“Make sure the chemistry is right between you, the buyer and your clients. The best deals will fall apart if you don’t get along with the person.”

One way he has done this is by having two younger advisors call his clients’ beneficiaries to verify name, address and date of birth. The advisors let the beneficiaries know that they’ll extend their parents’ process to them. This has resulted in a 40 percent ratio of turning the second generation into clients, he said. “It’s a great way to solidly hold them to the firm if something happens to the parents.”

Build a firm for sale. Product sales aren’t transferable, and solo practices are often too closely linked to the individual advisor. The most valuable financial services businesses are ensemble practices, Heckert said. “The value becomes significant because it’s not tied to the owner."

Start with the end in mind. Start five years before you actually plan to exit the business. This gives you time to tighten up expenses, clean up your books and increase recurring revenue and referrals.

Find a buyer. Network through MDRT and your local financial services associations. Talk to your broker-dealer, wholesalers and centers of influence for recommendations.

Secure staff and sales personnel. Create a contractual understanding of when the exit will happen. Lock in everything you can, so everyone knows upfront how the transition will proceed.

Treat it like a marriage. Be upfront and honest about the whole situation. Make sure the chemistry is right between you, the buyer and your clients. “The best deals will fall apart if you don’t get along with the person,” Heckert said.

If you’re the buyer

If you’re looking to purchase a financial services business, Heckert offers the following advice.

  1. Do your due diligence. Look at the profit and loss statements, net revenue, client list, commission statement and how much of the revenue is diversified. Look at the broker checks. Do a Google search. Find out everything you can.
  2. Look at where the business’ revenue is generated. Is it all in retirement plans and you have no experience in this? Look for business alignment.
  3. Meet with the firm’s top clients. Make sure the selling advisor has a story for the transition, since they’ll be introducing you to the clients. It’s often a relief for the client, Heckert said, since they’re aware the advisor is aging and a succession plan ensures their own financial future. Let these clients know what you can offer them.

Brian Heckert spoke at the 2018 MDRT EDGE.    Contact: Brian Heckert


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