Practice Valuation & Exit Strategy

Advising The Advisors

Like the cobbler’s kids with no shoes, are you tending to your own business planning?

by Ryan Grau and Kevin Stockton

Mr. Grau, CVA, CBA is the VP of Business Valuations and is also a partner at FP Transitions. Visit:;
Mr. Stockton, ChFC, CLU, RHU is the Director of Sales for Online Business Valuation at ValuSource.  Visit:  

As a financial services professional you undoubtedly do a great job of taking care of your clients – otherwise you wouldn’t be in practice! “Taking care of your clients” means, among other things, helping them to plan for and prepare for the future.

However, when it comes to their own practices, many financial professionals don’t heed their own advice. According to data amassed by FP Transitions over the past two decades, most practice owners fail to properly prepare their practice for a transition event. In this article, the transition event focused on will be the most commonly used exit strategy for practices, selling to a third-party.

Independent financial service practices fall into two segments, Independent Registered Representatives, and Independent Registered Investment Advisors (RIA). To better help you prepare for your transition event, we’ll first look at common value drivers and exit issues for each segment and then address unique issues to consider within each segment.

When talking about value drivers, we break them into three primary indices:

Transition risk, i.e., how likely it is that the client base of the selling practice will be retained by the new owner.
Cash flow quality, i.e., client demographics, growth of the practice as measured by AUM, top line revenue, new client acquisition, etc., and the percentage of recurring revenue vs. commission-based revenue.
Market Demand, for i.e., the size of the buyer network, practice type, geographic location.

Transition Risk
This is a measure of how strong the relationship is between the seller and their clients. If the owner has very little involvement in the practice transition risk can be substantially higher. Although having a service team and a business model that allows for a great deal of delegation is the most efficient in terms of the financial advisor’s time, a practice that has high owner involvement and interaction with clients is often perceived to be more valuable to a buyer. When a seller has strong relationships with their clients, the clients tend to be more receptive to working with the seller’s selected successor. For a sale of a personal service-based practice, the buyer is relying entirely on the seller’s ability to leverage their goodwill and help transitions the clients to buyer. This transition process is usually addressed by retaining the seller in a consultant capacity for a year after the sale. This not only helps the buyer with client retention, but it also motivates the seller to work hard at retaining clients, as there is typically a one-year look-back clause in the sale agreement. The look-back typically stipulates that if client retention, AUM, and/or top line revenues remain at 90% or greater, there will be no reduction in the purchase price of the practice. Anything short of these targets would result in a reduction of the value that the seller ultimately receives.

Cash Flow Quality

This is made up of a few different factors: the client demographics, the growth of the practice, and the revenue model.

Client Demographics
Client demographics are an important driver of value as they inform the buyer about where the clients are in their earning cycle and if there is a concentration risk of assets/revenue with a few large clients. Ideally, the majority of the clients should fall in the “prime age” range, of 50 to 60 years old as these clients are generally at the peak of their earning capability and at the top of their savings cycle.

Practice Growth
Growth of a practice is a factor that indicates the overall health of the practice. A practice that is growing – whether that’s defined as AUM, top line revenue, new client acquisition, and/or all of these – and has a transferable source for growth (i.e. client referrals, referrals from other services providers, etc.) are in higher demand and can command a higher value than a practice that is stagnant or in decline.

Revenue Model
According to FP Transitions transaction data, the number one driver of value is HOW the practice derives its revenue. If the revenue of the practice is heavily dependent on first-year commissions it is worth much less than a practice with the same revenue that has recurring revenue. A practice that must start from “$0” every January 1st presents more risk to a buyer and is not in high demand. As such, practices with commission-based revenue are worth less than a practice that has a reliable and predictable stream of income.

Market Demand

This is a function of location and how appealing a practice is based on its transition risk and cash flow quality. Practices located in or near large metropolitan areas benefit not only from having more buyers in the immediate area, but they present opportunities for out of state buyers to enter new desirable markets. Furthermore, a practice that has low transition risk and high cash flow quality are considered to have higher market demand as they are relatively few in number and tend to attract more interest.

the number one driver of value is HOW the practice derives its revenue. If the revenue of the practice is heavily dependent on first-year commissions it is worth much less than a practice with the same revenue that has recurring revenue. A practice that must start from “$0” every January 1st presents more risk to a buyer and is not in high demand...

So, what can we as financial professionals do to strategically plan for our eventual practice exit, even if it’s far off in the future? As the late business guru Stephen Covey suggested, we need to “Begin with the end in mind”. In this context, this means building, growing, structuring or re-structuring your practice today for your ultimate exit sometime in the future.

As a Registered Representative, this means eliminating the factors that lower the value of your practice. One unique aspect and often overlooked aspect in accessing market demand for Registered Representatives, is not only their geographic buyer pool, but the buyer pool within their Broker-Dealer network.

Specifically, you should consider a strategic alignment with a Broker-Dealer that has a large network – more Registered Representatives in the network means more potential buyers. Additionally, the Registered Representatives who focuses on a desirable client demographic profile will fare better when the time to sell arrives. And, most importantly, in order to get the highest value from the sale of the Registered Representative’s practice, recurring revenue should be the focus.

This means rather than taking that up-front, larger first-year commission, a Registered Representative should consider opting for the recurring fees of AUM, 12b-1 fees and insurance and annuity trail commissions. The difference in following these practices is dramatic, as the typical multiple range of registered representative practices is 0.5 to 3 of top line revenue – a whopping 600% difference!

Begin With The End In Mind

Given that most RIA practices are fee-only, they don’t have to address the issue of recurring and commission-based revenue. However, they do have issues surrounding their fee structure. The most common fee structure is to charge a tiered percentage based on the amount of assets the client wants the advisor to manage. With this fee model, balancing client demographics is important.

There should be a balance between smaller clients (defined by managed assets), which are typically charged a fee of one percent or more, and larger clients which are charged fees of one percent or less. Having a healthy balance of clients both small and large clients can alleviate concerns with having assets/revenue being produced from a few large clients.

Furthermore, this mix tends to promote diversity in the age of the clients. Another facet to consider is how competitive the fee schedule is compared to industry averages. Fees significantly below industry norms can cause buyers to pause, as they will have a much harder time transitioning acquired clients to their level of service and bringing those clients fees in line with their exiting clients. Fees significantly above industry norms, cause buyers to question the sustainability of the revenue especially when fees are being compressed across the industry. When properly structured, the typically multiple range for an RIA practice is 2.2 to 3.3 times top line revenue. FP Transitions’ internal 2019 statistics show that the average multiple for sales of RIA firms is 2.63.

In conclusion, whether you are a registered representative or an RIA, there are steps that can and need to be taken to enhance the value of your practice. These changes can take years to implement. If you want the most value for the years of hard work you have invested into your practice, then it is time to heed your own advice. Prepare for the future and plan for your exit… “Begin with the End in Mind”


1- Covey, Stephen. “The 7 Habits of Highly Effective People”. New York, Free Press, August 15, 1989.


Ryan Grau, CVA, CBA is the VP of Business Valuations and is also a partner at FP Transitions. Since 1999 FP Transitions has been providing expert guidance in areas that include: Practice valuation, benchmarking and ”Equity management” to the investment advice and insurance industries. The firm specializes in building financial service businesses of enduring and transferable value. They have also created and continue to operate the largest open market for buying and selling financial practices. To have your practice valued and benchmarked, FP Transitions is offering a one-month free membership to their Equity Management Program. To learn more, Visit: and use promo code AM30.
Kevin Stockton, ChFC, CLU, RHU is the Director of Sales for Online Business Valuation at ValuSource. Online Business Valuation is designed as a value-added service offering and as a prospecting tool for financial professionals who work with or want to work with privately-held businesses and their owners. Visit:  For a FREE demo and 15-day trial of the Online Business Valuation platform, contact