Denver (Sept. 15, 2004) — It’s a seller’s market for financial advisory firms, but the sellers might not be who you’d expect, an expert on the buying and selling of practices told attendees at the Financial Planning Association’s annual conference this week.

“When we started FP Transitions five years ago, we thought most people would retire at age 65 or 70,” said David Grau, president of Business Transitions LLC, which matches buyers and sellers for advisory firms, accounting firms and insurance firms. “However, we found that most people who are still in the business at 65 or 70 want to stay in the business and don’t plan to retire. Most sellers are around age 55, and most of them list their practices for sale with less than six months of advance planning.”

Today, there are 25 buyers for every seller, according to Grau, who noted that in 2003, his firm saw an average of 31 inquiries per seller, up from 19 in 2000. He also noted that while five years ago, he thought everyone selling a practice should have a formal business valuation, he found that almost no one wants a formal valuation, and that most sellers use multiples of gross revenue to price their practices, even though experts warn against relying on them, since value can vary widely based on the individual practice and the terms of the deal. Grau’s remarks came during a discussion on succession planning along with Tim Welsh, director of strategic programs for Schwab Institutional.

Grau also noted that fee-only and fee-based practices sell higher than commission-only practices. In 2003, the average price-to-gross-revenue multiple for a commission-only advisory practice was 1.05. For fee-based practices that multiple was 1.76, and for fee-only practices, it was 2.10.

In discussing ways to optimize value, Grau offered attendees benchmarks for cash flow. Sellers should aim for direct expense (compensation) of no more than 35 percent, gross profit of about 65 percent, overhead (such as rent) of about 40 percent, for operating profit of 25 percent.

Grau also advised sellers against starting the process by only focusing on what their firm is worth, and instead said that they should first consider what kind of buyer would be most compatible with their clients. “Independent advisors and independent reps rarely sell to the highest bidder. They tend to go for the better fit for their clients,” he said.

Schwab’s Welsh added that the buyers who are most successful “have a well-thought strategy of why they want to buy and what they’re trying to accomplish.”


— Melissa Klein Aguilar

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