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How to Find the Best Match When Selling Your Practice

Basic considerations for a successful exit strategy

By David Grau Sr.

For independent financial advisors who have finally accepted their own mortality, or at least recognized that they will eventually need an exit strategy for the business they have built, there are a host of important questions to consider. The foremost of these is: How can I find the best match for my practice?

In reality, this question covers two main concerns. The first is about finding a buyer—or a successor—who will continue to provide or even improve upon the current level of client service. The second issue is about finding a buyer who will offer the best value, on the best terms, and will motivate both parties to make the transaction successful.

Unfortunately, all too often, sellers don’t conduct sufficient due diligence when exploring a sale and settle for the first offer that comes along. Although they would never recommend such a precipitous or cavalier approach when buying or selling an investment for a client, when it comes to their own practice—at the culmination of their career, no less—they tend to take the easy way out. They often limit their circle of buyers to whomever their broker/dealer offers up as a possibility, or they jump at a letter they got in the mail, or they simply look to a friend or colleague to take over.

While having fewer options might make the decision simpler, one could liken it to selling a home. It might be easy to take the first offer or just seek out a buyer among your friends, but few would ever choose to do that, since it foregoes the benefit of knowing how the market truly values the property.

Moreover, sellers should understand that they will need to work with their buyers for a period of time after the sale, and look their clients in the eye in order to confirm that this final decision is the right one for their client base.

The Three Potential Buyer Groups 

In today’s seller’s market, the list of potential buyers is practically endless. Among the possibilities are a friend, a superior, a competitor, a consolidator, an OSJ, an RIA firm, a bank, a credit union, a CPA firm, a son or daughter, key employees—the list can go on. But taking a 30,000-foot view, the basic choices are best summarized as strategic, financial and internal.

  • Strategic buyers are most concerned about the synergistic effect of the acquisition. They expect to generate more value from the acquisition than the intrinsic value of the book, practice or business being acquired would otherwise suggest, and thus are sometimes willing to pay a higher price for the opportunity. 

In many circumstances, however, these strategic buyers, such as law firms, CPA firms or banks, are unrelated businesses seeking to implement cross-selling strategies. Although these can offer intriguing possibilities, the reality of mixing two different cultures can be difficult and sometimes disappointing.

  • Financial buyers are focused on the financial return from their investment. Although they don’t overlook the strategic aspects of the acquisition, what differentiates them are their repeatable systems and processes for making acquisitions. A good example of this model are consolidators. Their success lies in repeating their processes again and again, thereby continuing to grow and gaining through their efficiencies.

In these situations, sellers tend to adapt to the buyer, not the other way around. Often, the financial buyer wants the seller to remain in place in some capacity, maintaining a minority or even a majority equity stake to assure operational continuity.

  • Internal buyers work with or for the seller as individuals or key employees, or are fellow shareowners, or even family members. This group generally buys out the senior owner gradually as the business continues to grow.

This group may indeed be able to offer lucrative retirement strategies to the founding generation that may surpass those of either a strategic or financial buyer, but the catch is that the succession planning process often takes as long as 10 to 15 years. In a pure “exit” strategy, in which the buyout takes place all at once, internal candidates may lack the financial resources that a strategic or financial buyer can bring to the table. While recent innovations in bank financing may help make up for this difference, the internal buyer’s lack of experience is often an equally difficult challenge to overcome.

While internal buyers are generally the best place to begin the search for a “best match,” the open market provides the largest pool of applicants, including both strategic and financial buyers, which can enable the seller to find a hand-picked, quality replacement to serve their clients’ best interests.    

Getting the Cultural and Operational Fit Right

With the above buyer groups in mind, a selling advisor should always focus on finding the best operational and cultural match. 

At FP Transitions, we have distilled a checklist of essential qualities to look for in a potential buyer, specifying over 13 fundamental attributes. These include:

  • A similar investment philosophy and regulatory structure
  • Compatible personality with the seller
  • Capacity to take on many new clients quickly
  • Ability to pay market value on reasonable terms
  • Financial ability and stability to handle the acquisition costs, even in a downmarket
  • Willingness to structure the transaction for beneficial tax treatment
  • Experience and credentials to earn the clients’ trust
  • Appropriate location or geography
  • The same or higher level of technology
  • Ability to provide added value to clients, beyond what the seller could offer
  • A strong and loyal staff
  • A larger business model, with a younger team of owners/advisors
  • A continuity and succession plan of their own

While sellers can elect to shorten this list, experience teaches us that it is best not to deviate from it too much. By carefully studying the field of applicants, sellers might be surprised by the extent to which they are able to attain most, if not all, of these goals—which, of course, will not only benefit them but their clients as well.

Ultimately, that is the power of today’s strong seller’s market: It isn’t about receiving 50 offers, but rather narrowing the field of auditioning candidates to the best two or three and then letting those prospects prove they can solve all of these issues.

Finally, once these issues are resolved, focusing on the next hurdle—setting the actual price and terms—will become an easier and clearer matter to address. 

David Grau Sr., J.D., is the president and founder of FP Transitions. The above is adapted and excerpted from his second book, Buying, Selling, & Valuing Financial Practices: The FP Transitions M&A Guide published by John Wiley & Sons in August 2016.

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