The Advisory Career

Equity and Succession Planning

Practice valuation considerations

by Tiffany Markarian

Ms. Markarian is the managing director of Advantus Marketing and adjunct Director of Consulting for Weylman Consulting Group. She can be reached at 617-312-0591 or at

Part II in a two-part series

Valuing Your Practice

Proper practice valuation should not simply be done by looking at your income statements or AUM. Valuation is a sophisticated process that represents the due diligence a buyer would conduct if they were to purchase your practice. Your practice may have $75 million plus in AUM or significant fee-for-planning revenues, but that is not the sole driver a buyer or a valuation professional will look at. For most financial advisors, determining the value of your practice is not just about establishing a simple dollar price for the practice.

One valuation company, FP Transitions, based in Portland, Oregon, created the open market listing system for the financial services industry in 1999 and has since been continually refining their valuation models as economies and marketplace dynamics evolve. Today, they are the nation’s leading provider of equity management, valuation and succession planning services for the financial services industry. As stated by president and founder, David Grau, Sr., JD, “The process of having your practice formally and professionally valued is about so much more than just putting a number on what you’ve built.

Valuation is the first and most important step in the business building and planning process. Most advisors use the valuation process to learn about what drives value, and then they spend the next ten years refining and adjusting those value drivers to maximize value and the underlying cash flows that support not only that result, but their lifestyle as well. As an independent practice owner, you owe it to yourself to go through the valuation process at least once – you’ll never look at your practice the same way again.”

Unlike industries such as retail or medical practices that have physical plant, equipment and inventory that is easily valued, financial services practices have more complex dynamics that need to be considered in determining a valuation. The valuation for a financial services practice weighs heavily on the deep relationships the advisor has with the clients who hold the assets. Your business may have revenue, but if your client relationships are transactional in nature with no deep relationships, there is the transition risk that those clients will leave to go with another advisor and not stay with the successor.

This is why it is recommended to have a successor in place, early, who can be introduced to clients over a period of years, deepen the relationships, and increase the likelihood that the fees or AUM revenues will remain post-transition.

Most financial advisors who have successfully sold their practices at premium values have demonstrated true business-like characteristics. There have experience in many areas of wealth and estate management and have long-term office staff and personnel who help provide a wide platform of services to cultivate clients. There are predictable planning fees or recurring revenues, a well-balanced product mix within the AUM portfolio to provide full comprehensive planning, and multiple products per client. The practice is structured with a focus on discovery, planning and client cultivation so that deep emotional relationships are the outcome. It is also evident that assets or planning fees are transferring to other generations of the clients’ families. The client relationships within the practice, not just the fees or AUM revenues, are what are valued through a variety of indicators and indexes that is predicted throughout the valuation process.

Valuing Insurance Lines within a Portfolio

While the market for buying and selling financial practices has been traditionally driven by fees and revenues, companies like FP Transitions have been working with major insurance carriers over the last several years to now include insurance lines. It is helpful to note that insurance lines can actually help the overall practice valuation.

Advisors who include insurance analysis or products in their overall planning are considered to be operating at a deep level of comprehensive planning and overall asset protection. In the past, insurance lines have not been considered in valuations, as most companies have restrictions that do not allowed the sale or transfer of insurance lines. However, by assessing the dynamics of the insurance block, it is possible to provide a wealth indicator assessment and a propensity for future business opportunities that can be part of the overall practice valuation.

  • The value of the insurance lines within an advisor’s practice can be assessed using three components that each serve as indicators of the clients’ wealth. The purpose of the insurance side of a valuation is not to sell those lines, but to predict the future opportunity for planning or revenues that could result by serving these clients over time and deepening the relationships further. The indicators that are looked at include, but are not limited to:
  • The first year commissions (FYC) generated annually.
  • The renewals or trail compensation.
  • The level of persistency/loyalty/relationships held with the clients (a helpful predictor in assessing transition risk for the buyer).

When you look at the future needs of a client, called the Client Life Cycle, you are assessing the book of business based on the ability to accumulate and protect the clients’ wealth, and pass that wealth on to future generations efficiently. That is why it is critical for an advisor to have proper CRM and data mining technology in place, along with regular client appreciation, cultivation and communication programs, both for their own practice growth, but for the benefit of a buyer or future equity partner. Not having these systems built and in place could likely lower the overall value of your business.

The degree of persistency, contact and active cultivation you provide your clients is a direct indicator of loyalty, which is necessary for the successor to assess the transition risk of purchasing your practice. Further, loyal clients can be more open to future financial planning and wealth management concepts presented by the successor.

The insurance valuation process will include an index to measure the degree of your Client Relationships. This is not only determined by whether or not you have a CRM, but also based on the retention of clients by the practice over the last several years, the number of products or services per household, the date of last purchase by the clients and how frequently they are seen for reviews.

Practices which have long-term staff in place are generally considered to have a higher value, since there is active support to help foster and maintain client relationships. The insurance valuation also takes into consideration a Client Wealth Index based on factors such as insurance policy face values, average premiums and types of products. It will look at your term insurance blocks, universal insurance, whole life insurance, long-term care and other policies, along with the ages of those clients and how long those policies have been in-force.

Your Practice Valuation

Advisors who include insurance analysis or products in their overall planning are considered to be operating at a deep level of comprehensive planning and overall asset protection

The value of your practice, when done thoroughly, is not typically provided with a single dollar amount. This is due to the fact that many practice transitions can occur based on an emergency short sale (i.e. an unexpected death or disability), a buy-out over time that occurs in stages, or a buy-out that involves the seller staying on post-sale for a period of time to support the successor. As a result, a tiered valuation should be provided based on the terms and conditions of the sale. If the successor will have support from the seller over a period of several months or years post-transition to help conserve the client relationships, that could command a potentially higher practice valuation.

Valuations can cost between $1,000 to $2,000 or more and can be one of the most valuable expenditures you undertake in your business planning. The valuation can provide necessary insight into the areas of your practice that should be corrected to help increase your practice value. For instance, you could conduct a valuation for two advisors, one with 10 years of experience and a deep level of financial planning and cloud-based technology integration. The other advisor has 20 years of industry experience and has built their business based on FYC and upfront compensation, desktop CRM technology and has significantly more clients. If you run their practice valuations, it would not be surprising that the 10-year advisor might have a practice valuation that is several hundred thousand dollars higher than their more senior counterpart.

The Landscape

Whereas in past decades, the succession model for broker/dealer-affiliated advisors was to retire, take their vested benefits and leave their clients to be redistributed by the firm they were affiliated with; today, the marketplace is evolving rapidly to a model where many broker/dealers are allowing their advisors to sell their practices to other advisors within the proprietary broker/dealer – thus creating their own marketplace for transactions. Some of these broker/dealers have financing arrangements to support the equity sale and transition process, but they are not all alike. Some have a cap on the amount of the transaction sale and others have specific requirements that are mandated for the financing to be secured. Regardless of whether or not financing is available, proper due diligence, legal, tax and regulatory expertise needs to be consulted if you decide to sell or gradually transition the sale of your practice. You need to make sure that a buyer is properly licensed, has the capital to finance the transaction and has the expertise to serve and support your client needs.

In the case of broker/dealers that support practice transitions through equity financing, the benefit to the advisor is that the successor may not have to secure the entire note through personal assets – though that is not always the norm and credit and background checks would most likely be required. In these cases, if the buyer defaults on their production requirements or other mandates, the assets of the practice stay within the broker/dealer. The contract stipulations of the broker/dealer are the guiding authority in these cases. In the case of advisors who wish to buy/sell their practice in the pure independent RIA space, the responsibility is on both parties to do their due diligence, secure proper tax and legal guidance, secure financing and determine parameters pre- and post-transition. This may involve financing of the note through personal assets, which is risky for both parties, but you may also have more control of the parameters of the transaction, provided they are clearly spelled out in writing using the proper legal, regulatory, business and tax channels.

Regardless of which route the advisor takes in their succession planning, a proper valuation of the practice is the key starting point, at least seven to ten years before a sale or succession path is to be considered. From there, it is a good practice to value your business every two years to see if the changes you are making are having the desired effect on your practice value.

To exit…or not to exit

It is important to understand that succession planning for a financial services practice does not always mean sell the business and exit. When planned for early, it is possible to realize the equity from your practice through a gradual sale/transition and still have the benefit of staying in practice on a more limited scale. For instance, an advisor may have several hundred clients, but that advisor may wish to start focusing more on their lifestyle and scale back their working hours and clients served. With a properly structured succession plan, an advisor can sell their lower level B or C client interests to another advisor and just focus on managing the A clients. This may allow the advisor to provide more focused relational engagement with their top clients or reduce their work weeks to four, three or two days a week as part of their eventual transition – depending on their abilities to manage the practice.

When advisors wait too long to begin the succession process, they may be faced with a short-term decision to sell, which may reduce their practice equity value vs. had they started the process years before.

Many successful financial advisors utilize a business or marketing consultant to assist in improving their overall practice management and client development. Improving your abilities in practice management may not only provide a means to help with your present-day business growth, but it may also have the added benefit of increasing the future equity value of your practice. The more operational strategies you can employ to serve the needs of your clients, communicate with and retain clients, and develop a balanced mix of services and business offerings, the greater position of strength you can be in.

Once your valuation is complete, you will have more clarity on how to drive the future equity value of your practice. In doing so, you are in a position to answer some of the questions you may have for yourself in the future, such as:

  • When will I be ready to step aside from my practice, both emotionally and financially?
  • Do I want to retire and sell the business or incorporate a future successor into my practice now?
  • Who will help me with the financing, due diligence, regulatory, legal and tax aspects of a transition?
  • How would I want to receive a payout for my practice?
  • Is my retirement dependent on my selling the practice?

Preparing for equity and succession planning now can help you set guidelines and goals for future decision making. It can help you establish practice management strategies purposefully and proactively, while considering the contingencies along the way. Valuation is a clear means of measuring your success and a process that can help you allocate your resources such as staff, marketing dollars and time in a more orderly and systematic manner. Most importantly, it allows you to put in place a set of actions that are consistent with the intentions you have for your future.

Read Part I here.






The concepts and content discussed in this article are meant to be educational in nature and are not to serve as specific business, financial, tax, legal or regulatory guidance. Individuals are advised to seek the counsel of such licensed professionals. Advantus Marketing, FP Transitions and Weylman Consulting Group are independent entities and are independently responsible for their own respective lines of business and activities.