The No. 1 thing buyers and sellers are concerned about when buying a business

By David Grau Jr.

Financial advisors looking to buy or sell a practice often ask me how to best determine a practice’s value. While there are a lot of technical answers to this question, the most important element is to understand what is most valuable in a practice — and that is the relationships with clients.

Revenue and assets are all important but are secondary to the client relationships. Without clients, there is no income, or value, for a buyer. The revenue that is generated from the client relationships is also important — if the practice doesn’t generate income, it won’t have value to a buyer or seller. Therefore, client retention is key to any deal and a seller extracting value.

Unfortunately, clients aren’t always easy to transfer. People are funny about their money, and an advisor may spend 20 years building trust with their clients, so transitioning this trust to a buyer requires planning. This is why a transition period with both the buyer and seller committed and involved in the process is critical. Without it, you will see higher client attrition rates.

Retention rates

Retention rates on deals measured 12 and 24 months out are typically around 90 to 95 percent, conservatively. Again, that has a lot to do with the transition and how long the buyer and seller get a chance to work together. The sweet spot is probably 12 to 18 months of teaming. Less than 12-month transition periods happen, but are considered almost like a fire sale from a buyer’s perspective, and will be priced accordingly. You only transition clients you’ve had for 20 years in less than 12 months because some other external factor is occurring, such as the business owner becoming sick. If you have more than 12 months, but usually less than five years, you’ll typically retain 95 to 100 percent of clients, and in many cases, you will actually see the revenue from the acquired clients increase post-sale.  

Of course, there are several other factors that go into establishing the value of a business, such as the potential income generated by the clients who are staying and how recurring that revenue is. It’s not a black-and-white issue, and losing clients isn’t always bad. Still, in any deal, you want to know the value of what you’re selling and what you’re buying. Your business is your masterpiece — advisors should give it the time and attention it deserves as you consider handing it off to someone else.

• Read more from Grau in “5 steps business owners can take to ensure a good transition” and “What successors need to know.”
• Watch “7 key things you should know when buying a financial services practice.”

David Grau Jr. is the president of Succession Resource Group, a succession planning consulting firm that specializes in working with financial advisors.