There’s more to selling your book than making a pretty penny.
Carving out – and prioritizing – the terms of the deal are perhaps the bigger fish to fry.
Here are five components experts say
you should consider if selling your practice is on the horizon.
1. Cash down payments
These typically range from 10 per cent to 40 per cent of a practice’s value – which fluctuates - and is negotiated between the buyer and the seller. Sellers, who want to hand the practice over with little involvement once the deal goes through, typically want more money up front. According to FP Transitions, which specializes in helping build and guide financial services businesses, the average cash down payment was 33 per cent in 2013.
2. Notes for the hands-on seller
Sellers, who wish to have a hand in the practice during the handover, will benefit from adjustable rate notes, or ARNs. These promissory notes are provided by the buyer guaranteeing the seller payments of principal, plus interest – which vary in size and time distributed. Some are paid annually, others every few years. Interest rates will also vary dependent upon the buyer’s asset attainment and/or revenue targets.
“They’ve (buyers) got to provide their own infrastructure and they need to educate themselves and wait for their businesses to evolve, as it doesn’t happen overnight,” says Tony Bostock, a retiring advisor with the William Douglas Group, who is the process of selling his book.
3. Determining Earnouts
Earn-out bonuses are another incentive for sellers to stick around as they hand their business over. To ensure the buyer’s success, sellers would show face, either by appearing in the office regularly, even daily, or be ‘on-call’ to provide guidance and assistance, for a period of time until the pre-determined earn-out period expires. Like back-end incentives or bonuses – earn-outs set gross revenue or asset bogies (performance benchmarks) – and can include provisions if the seller adequately help fuel the business.
“We really worked as a team, kind of like Batman and Robin,” says Bostock. “We met a significant number of clients together, and introduced (the new advisor) as the successor agent either now or in the future…”
4. Taxes: Who claims what?
Who claims the capital gains rate from the sale and other factors including revenue multiples, earnouts and the rate on ARNs will all have to be negotiated between the buyer and the seller. Yearly consulting fees, perhaps earned by the seller, must also be taken into consideration.
5. Revenue multiples
[Price to Sales Ratio = Market Value of Equity/Revenue & Enterprise Value to Sales Ratio = (Market Value of Equity + Debt – Cash)/Revenue]
Revenue multiples DO matter and many businesses sell for between one and a-half to three times revenues. But making sure your buyer is the right fit for your business trumps all other terms of the deal. Seeking out someone who runs a similar type of practice with parallel ideals and philosophies are key to making the right choice.
On the advice of Bosnok: “I went through my personal contacts and (examined) their personal exposure, backed up by really solid references and recommendations from other people in the industry whom I respect and trust.”
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