"Some advisors are adamant about using a systematic process for managing their clients' finances but fail to take the same systematic approach when it comes time to sell their businesses."

Cashing In

By John Bowen

All of your day-to-day and year-to-year efforts to grow your planning business ultimately lead to one finale: selling your firm. It's a process full of potential and risk. Done properly, you'll be well rewarded for the hard work you've put in over the years. Done improperly, you'll miss out on hundreds of thousands or even millions of dollars.

Reprinted from:

More advisors are considering selling, but underestimate the effort it takes. Here are the five most common mistakes I see—and how you can avoid them.

Not Thinking Like an Entrepreneur

Many advisors think of themselves as financial advisors first, and entrepreneurs second. As a result, they don't create the equity they deserve. As an entrepreneur, you should be most concerned with three key elements of your practice:

• Human capital—the staff you've developed to keep your practice humming;
• Intellectual property—the business systems and processes you've created and refined over the years; and
• Client service systems—the entire range of techniques you've designed to ensure happy, loyal clients.

To the extent that you're able to transfer these elements to another advisor—so he or she can run the business profitably from day one—you'll have a much more valuable business. This requires designing and documenting systems that will run smoothly without you.

Not Adequately Preparing

Many advisors move blithely into the sales process, assuming that there is little they need do to prepare. But the right preparation can make a tremendous difference. There are four steps to get ready:

• Have a clean strategy and platform. Develop a thoughtful and credible business and strategic plan in which the entire management team believes.
• Get your documentation in order. You need good documentation of how your company works and how each component functions. You need to be able to present accurate financial statements and controls, so hire an accounting firm to prepare statements and perform an audit, if needed.
• Solidify your relationships. Make sure your relationships with the key people in and around your firm, including partners, employees and investors, are strong. You can't afford tenuous relationships at this time.
• Maintain an equity-creation orientation. Always remember that the elements of your firm that will make it attractive to a buyer are the same ones that made it a success. Stay focused on your value drivers: good and growing cash flow; highly satisfied, loyal clients; and excellent management processes.

Not Using a Systematic Process

Some advisors are adamant about using a systematic process for managing their clients' finances but fail to take the same systematic approach when it comes time to sell their businesses. Again, the potential downside of moving haphazardly is enormous. A systematic sales process has three stages:

Stage 1: Preparation (two to four months). Steps include agreeing on objectives, preparing all necessary materials and developing buyer lists.

Prepare in advance all the documentation that might interest a prospective buyer. This includes the offering memorandum, audited financial statements, financial models and valuations. Do these upfront so they don't disrupt your business once you start the auction process.

Stage 2: Marketing (four to six months). During this stage, you should contact potential buyers, determine interest, distribute documents, provide follow-up question-and-answer information and conduct management interviews with selected buyers.

Put together a list of the most attractive potential buyers, then stratify them in a way that makes sense for your deal. Typically, buyers are categorized by how fast they can move and how interested they might be. Always deal with the slow movers and least interested first and the fast movers and very interested last, so you get them all to the finish line at the same time.

Stage 3: Closure (two to four months). Steps include distributing term sheets, reviewing term sheets and selecting the top deal and best buyer, inviting runners-up to supersede the top deal, signing the term sheet, conducting formal due diligence, negotiating a definitive agreement and closing the deal.

At all times, your selling process should be disciplined and fair. Prepare and deliver quality information to all buyers. Effectively communicate your terms and level of flexibility in structural, financial and personnel considerations. Run a compelling campaign targeting the largest number of qualified and motivated buyers. And make sure that you control the information flow, ensure confidentiality and generate competition.

Courting the Wrong Type of Buyer

Many advisors have no clear idea of what a good buyer actually looks like. They start sharing that their business is for sale with everyone, focusing first on key employees, then on competitors and then on key clients. All of these markets have inherent problems.

For a relatively low cost, key employees can "move across the street" and take your clients with them. Employees, therefore, are going to be the least willing to pay much for your company. They can effectively buy your business for book value—a much lower price than any knowledgeable advisor should sell for.

Competitors are a high risk for three reasons. First, during the due diligence phase—before any funds have changed hands—they can obtain proprietary information, such as your client list. Second, selling carries a negative connotation, particularly if you've been on the market for a long time, and they may use this to their advantage. Third, even though you can ask potential buyers to sign a confidentiality agreement, people talk. The temptation to share a secret almost ensures that word will get out.

Tread carefully about approaching your clients to buy your firm. If the deal doesn't go through, you're likely to lose the client. The approach alone could cause you to lose some credibility as their financial advisor (even if, given the regulatory environment, you could figure out a way to approach them).

What kind of a buyer do you want? Seek out this profile:

• Someone who will pay a lot of money. Clearly, you want to receive the highest possible price for your firm.
• Someone you like. If you are remaining with the company after the sale, this is particularly important. It's less of an issue if you are exiting immediately.
• Someone who will take care of your clients. Your continued equity creation will depend on how well the firm performs while you remain there.
• Someone who will respect the good name of your firm. You want the effort you put into building your firm's reputation to persist after you've departed.

Going It Alone

Because they're so knowledgeable about the financial services market, some advisors assume they have the expertise they need to sell their business. You may be tempted to go it alone, but at some point you're going to recognize that you need help, and then it might be too late.

The case for enlisting a professional advisor is strong. It's a fact that if you don't have a pro on your side, you'll leave a substantial amount of money on the table. I've seen advisors sell their firms for millions less than they could have. Given the amount of work you've put into your business, that would be disastrous.

Where should you seek help? Generally speaking, you have two options.

The first is a local CPA or attorney. While these professionals will be experts on tax or legal issues, they may not have expertise in selling a financial advisory business. They may gain a great deal of expertise while working on your sale, but you would be the one paying for their education—and it could be expensive.

Your second and far better option is to hire an expert. For small practice sales or partial book sales, FP Transitions can be a good solution. For a larger business, consider someone with deep domain expertise in the financial advisory area. Specialists of this type include Mark Tibergien (of accounting firm Moss Adams) and Dan Seivert (of investment banking firm 3C Financial Partners).

By avoiding these five common missteps, you can help ensure that you're compensated fairly for all the work you've put in building your practice.