Selling an Advisory Practice: How to Prepare

Author: Robert Morales CFP®, Head of Advisory Services and Products

Within the next 10 years, 37% of financial advisors are expected to retire, according to Cerulli Associates. However, 25% of these retiring advisors are unsure of their succession plan.

Selling an advisory practice to the right person at the right price can be a complicated process that requires planning and consideration of several factors. Making sure that the sale is handled correctly is not only important for an advisor’s financial future but also for the impacted clients’ experience and the advisor’s legacy. Let’s look at the steps advisors need to take to prepare for the sale of their practice.

Maximizing the Value of the Practice

When it comes time to sell their practice, many advisors are faced with an aging client base and potentially declining revenue. That’s why it may be helpful to set a target date to sell a practice a few years in advance so that steps can be taken to maximize the value of the business to attract the most appealing suitors.

It’s critical for the selling advisor to understand their book of business and demographics early enough in the process so that if adjustments need to be made, there is enough time to make an impact on the value of the business. For example, if the practice consists of mostly older clients, the advisor can focus on prospecting and onboarding younger clients, as well as multi-generational planning.

In addition, if the advisor doesn’t already have a CRM system in place, they may want to invest in one so that they can easily track and show potential buyers’ areas, such as client demographics, which clients are engaged in multi-generational planning, the types of assets, and the potential for new money coming in. Other areas to consider for maximizing value are:

  • Revenue mix: The most valuable revenue sources are those that are consistent and recurring, such as fees, trails, 12-b1s, renewals and financial planning.
  • Growth rate: Buyers will pay a premium for growing businesses that can also show sustainable growth sources.
  • Client service model: Having a clearly defined service model for A and B clients will make buyers feel confident that the business is run efficiently with consistent service delivery for clients.
  • Systems and processes: Well-documented and defined processes and workflows in a practice will make it easier for a buyer to step in and ensure a smooth transition for clients.

Valuing the Practice

Determining the value of the practice is a critical early step in the selling process that will establish a place to begin negotiations and avoid leaving any money on the table. A general rule of thumb for estimating the value of an advisory practice is to multiply the trailing 12 amount for managed money by 2 ½ times, and then add the trailing 12 amount for brokerage accounts.

The amount a seller can receive may also depend on the market at the time. If the buyers outnumber sellers, an advisor may be able to get up to three times on recurring revenue if their practice is well positioned and prepped for sale.

Other items to look at may include operational costs and profit margins of the practice and determining if the seller will assume any expenses. Additional considerations that could impact value include cash flow projections, client retention rates, fee structure, and the valuation of similar advisory practices in the area where the practice is being sold.

Structuring the Sale

There are several considerations when looking at how the seller of an advisory practice is paid and the way the sale is structured. A major consideration is whether they want to receive one check for an outright sale or prefer to build a more gradual five-year payout structure. There are some advantages and disadvantages to both methods.

With an outright sale, the advisor receives the entire purchase price up front and can then invest or use that money as needed to fund their retirement. However, taking the money in a lump sum will usually result in a higher tax rate. In addition, these types of sales typically don’t allow for a transition time to help clients and staff get to know the new advisor with assistance from the selling advisor, which may impact retention rates. Also, if the advisor is selling a high growth business, they could be leaving money on the table if the value of the business is expected to increase significantly in the next five years.

A five-year payout structure allows an advisor to transition the business to the new advisor gradually with payments to the selling advisor made over five years based on an agreed upon formula. From a tax standpoint, this will likely lower the capital gains rate on the total purchase price. In terms of the transition, it allows the selling advisor to spend time assisting the new advisor with the transition, whether through personal letters, phone calls or virtual meetings, client appreciation events, social media posts, and in person meetings. This will help ensure clients and staff, if applicable, stay with the new advisor and the overall transition is smoother for all parties involved. The longer time period does come with some risk if the tax code is changed during the five-year period which could undo some of the tax benefits.

There are many ways to structure the sale, and most advisors will consult with their broker-dealer firm’s practice management team or a consultant who specializes in the sale of advisory practices to ensure they maximize the value they receive from their practice.

Finding a Buyer

Another critical step is finding the right buyer to purchase the practice. That’s why it’s important to start at least a few years early so that a match can be found that is well suited for the practice. Advisors will want to ensure the buyer doesn’t have any liability issues from a regulatory standpoint. The buyer chosen should also offer similar products and services as the selling firm and be a good cultural fit to ensure clients and staff feel comfortable and are more likely to stay with the new firm. This step is particularly important when client retention is part of the payout structure of the sale.

When searching for a buyer, many advisors will start the search with their existing connections at their firm or in the industry. If they don’t have anyone in mind, they can also talk to their current broker/dealer which may be able to match the seller with other advisors interested in expanding their practices through a purchase. Some advisors may also work with an M&A consultant who can assist with finding potential buyers, as well as advise on the best way to structure the deal. Either way, it’s not recommended to jump at the first buyer but rather to have conversations with several potential suitors to get the most value from the business and leave clients and staff in good hands.

Getting Started

The best time to get started with succession planning and the potential sale of a practice is now. While it could seem premature to prepare for a sale when an advisor is 40 or even 50, the idea is to have a goal in mind – whether planning to pass on the business to a family member or partner or sell the practice to a third party – so that the way the business is built over time is done with this end state in mind.

To learn more about ways to prepare for and structure the sale of your practice, contact Robert Morales CFP®, Head of Advisory Services and Products at

To learn more about Momentum Independent Network, contact Wealth Management at or 833-4HILLTOP.

The paper/commentary was prepared by Momentum Independent Network (MIN). Momentum Independent Network, Inc. is a registered broker-dealer and registered investment advisor that does not provide tax or legal advice. MIN and Hilltop Securities are wholly owned subsidiaries of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, TX 75201, (214) 859-1800, 833-4HILLTOP. Member FINRA/SIPC

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