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What's Your Book Worth?

What is a book of business worth in the free market? The quick and dirty answer is somewhere between one to two times gross revenue. That's for an independent practice. Wirehouse reps and others who work for a firm don't own their books, so they're stuck with the less generous transition plans offered by their firms. Or they can jump ship for an upfront bonus or go independent, then work out a succession

What is a book of business worth in the free market? The quick and dirty answer is somewhere between one to two times gross revenue.

That's for an independent practice. Wirehouse reps and others who work for a firm don't own their books, so they're stuck with the less generous transition plans offered by their firms. Or they can jump ship for an upfront bonus or go independent, then work out a succession plan from there. More on that later.

Meanwhile, it's fun to window shop and see what practices similar to yours sell for in the free market, keeping in mind that book valuation is something of an art form.

Steve Testerman, president of, a recruitment firm based in Roswell, Ga., says your book of business is usually worth a maximum of 100% of your annual gross production, or 50 to 150 basis points of your assets under management.

“The price can be affected by product mix, market cycles and the structure of the sale,” Testerman says, adding that most deals are paid out over four years.

David Goad, CEO of FPtransitions in Portland, Ore., says the books selling through his business are fetching anywhere from 1.1 to 2.1 times annual gross revenue. That translates to a range from 0.8 to 3.8 times annual cash flow. Goad says his business is good, and like other book brokers, he reports more buyers than sellers (see “Valuation Resources,” Page 48).

What Buyers Want

A number of factors determine what a practice is worth, Goad says. They are, in order of importance:

  1. Free cash flow or future expected earnings. “Unlike other businesses, a financial practice generally has one thing you're purchasing — the income,” Goad says.

    In a survey of buyers conducted by FPtransitions, 46% say they are looking for practices with revenue in the $100,000 to $250,000 range, while 22% say they want books with annual revenue of $250,000 to $500,000.

  2. Probability of client retention. Done properly, with an earn-out in which the seller helps transition the book, client retention rates will be 90% or better, Goad says. Without that gradual and organized transition, retention rates will fall to 40% to 60%.

    That's why brokers who sell their books for cash generally make less money than those who agree to participate in the client handoff, Goad says. In an earn-out arrangement, the seller typically guarantees the buyer some minimum level of performance. “If the client retention rate drops or the revenue drops, the payment to the seller also drops,” Goad says. “The involvement of the seller is very important if he wants the most money possible.”

  3. Fees versus commissions. A book with lots of recurring revenue brings in more money than a book of transaction-heavy clients. “If you're a commission guy, basically your clients are being sold something,” Goad says. “If you're managing money, they're working with you because of the systems you've put in place, and it doesn't much matter who is talking to them on any given day.”

    FPtransitions found that 86% of buyers want fee-based businesses and 74% want financial planning businesses (see “Types of Practices Buyers Prefer,” below).

    At FPtransitions, a typical fee-only business sold for an average of 2.1 times revenue during 2000 — almost twice the 1.1 times revenue rate of an average commission-based business. Books with at least 70% in fee revenue sold for an average of 1.7 times revenue.

  4. Location. Location can determine anywhere from 10% to 40% of the value of your book, Goad says. Sellers in affluent, heavily populated communities with lots of potential buyers (such as New York) are attracting an average of 50 inquiries and five to eight “intent agreements” on the FPtransitions Web site, he says. Retirement communities are especially attractive.

  5. Comparable sales and intangibles. Buyers always compare your business with others having similar characteristics that sold recently. And things such as solid referral systems, a successful track record of seminars and marketing campaigns, and automated systems that organize client records also add value.

The Wirehouse Wrinkle

All this applies, of course, to an independent practice that can be sold via an arm's-length transaction. Although most wirehouses have transition programs to help you transfer your book to another broker inside your firm, these deals don't compare well with real transactions.

A wirehouse deal goes something like this: A broker sells his book to a colleague, agreeing to take a percentage of the book's annual payout over the course of three years — half the first year, 40% the second year, and 30% the third and final year. For a $500,000 producer with a 40% payout ($200,000 in annual income), that results in a sale price of about $240,000 over three years — no more than half the likely fair market value.

How can wirehouse reps extract more value from their book? Going independent and then selling out is one option. But that can be problematic.

“It causes disruption to the customer because all of the accounts have to be repapered and questions have to be answered,” says Justin Sladavic, an industry recruiter with Cross Search in El Cajon, Calif. “I think the ultimate buyer would lose a lot of those customers.”

Another option: Jump to a competing wirehouse and structure your sign-on bonus so you're free and clear once you've transitioned your book to another rep at the firm. You would need to first find a suitable buyer at the new firm and work up an appropriate phase-out arrangement.

It may even pay to approach your firm with a proposal to sell your book, even if you're joining another firm. A broker formerly with Dain Rauscher in Arizona says he sold his $325,000 annual gross book for roughly one times his annual payout, about $115,000, after suggesting a deal to management.

Although he was joining another broker/dealer, the broker knew he would be targeting much larger clients at the new firm, so he signed a noncompete agreement saying he would not solicit former clients from Dain Rauscher. Dain even provided loans to the reps who bought his business, he says.

“They were smart enough to realize that the FC owns the relationships,” the broker says. “If they hadn't agreed to this deal, I would have taken those clients with me.”

Who Owns Your Book?

Everybody knows that a wirehouse broker cannot sell his practice on the open market. Right?

Wrong. “We've had two examples, out of hundreds of listings in the past year and a half, of wirehouse brokers who listed their practices for sale,” says David Goad at FPtransitions, a Portland, Ore.-based business that matches buyers and sellers of independent financial practices.

When Goad asked those brokers to come up with some kind of proof that they actually owned their books, such as letters from their branch managers or a clause in their employment agreements, both balked. No sale.

“A lot of these brokers are in the dark,” Goad says. “They didn't read the [employment] agreement very closely or understand it.”

In most cases, your branch manager will decide who inherits your accounts or who buys your book.

Most major firms and many regionals assert that client accounts are trade secrets, and that information about clients is confidential and proprietary. “Registered reps must understand — even if they adamantly disagree with this — that the broker/dealer believes it has a bona fide property interest in the account,” says Bill Singer, a partner with the law firm of Singer Frumento LLP in New York.

Valuation Resources

  • The site offers a simple online calculator to determine the rough value of your practice. Go to and click on “Value a Practice.” Mutual Service Corp., a broker/dealer for independent reps, runs the site.

  • SunAmerica set up this Web site to find books for its brokers to buy. The firm is looking for practices that are at least five years old, have annual gross commissions or fees of $350,000 for an individual or $500,000 for a branch, and clean compliance records.

  • The site includes a list of practices for sale, and a downloadable version of “The Practice Transitions Report.”

Registered Representative welcomes your comments on this story. Contact Senior Editor Michael Hayes at [email protected] or call our editorial department at 800/621-0720.

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