Exit planning: Knowing what you want

By Cindy Jenner Cowan | May 3, 2007 | Last updated on May 3, 2007
5 min read

It’s true that a journey of a thousand miles begins with a single step. The trouble is you can journey in the wrong direction entirely if you don’t know where you are going. Successful exit planning begins with careful consideration of what you want and what’s possible. First there is a list of practical and emotional questions to consider.

The practical questions:

  • Do you plan to sell your practice, your book of business or a segment of client accounts?
  • Are the sale proceeds your entire retirement fund, or are they part of a larger plan?
  • What is your timeframe?

The emotional questions:

  • Do you want to see the practice you’ve built continue to flourish after you have retired?
  • Do you want a complete break from the business, or do you want to say goodbye slowly by working part-time?
  • Do you want to see a family member or employee take over the business? If so, how much will you charge for it, and what will be your involvement?

Once answered, these questions form your “selling strategy” and allow you to define what you are selling, when you plan to sell and how to assess the value of your offering. These answers will also help you write your sales memorandum — the marketing material needed to highlight and support the valuation of your practice or book of business.

When creating a sales memorandum, there are three areas you should consider:

1. Your selling strategy — Identify and resolve practical and emotional issues

It is essential to be thoughtful and take the time to weigh your objectives, needs and the financial requirements you’ll have once you’ve exited the business. To help understand these needs, ask yourself the following questions:

  • What personal objectives do you want to achieve? Consider your personal goals when deciding what to do with your practice or book of business.
  • Why are you planning to sell? Is your goal to focus on a select group of clients, pursue another career or retire?

What will be your role in the future? From the outset you’ll need to plan how you want to relinquish your practice or book of business. Do you want to take on a part-time role and work with a small group of clients or simply come in every so often to check on how things are going? Do you plan to leave your successor in charge once all clients have successfully transitioned?

If you love working in your practice so much that you can’t imagine not being involved in it, go for options that allow you to sell and retain some involvement. On the other hand, if you’re hoping to work really hard to build a business that will fund your retirement, opt for solutions that don’t require you to stay on after the successful transition of your clients. It will be imperative for you and your successor to foster an understanding and respect for each other’s wishes and agree about your future involvement well in advance of the actual transition.

  • What is your timeline? Consider when you want to retire and what resources you require to meet your financial needs once you have exited the business.
  • What are your strategic alternatives? Internal sales, desirable for those interested in a long timeframe or extended transition, are good for maximizing long-term financial gains and delivering a continuous client experience. External sales, meanwhile, are good for those interested in a rapid transition or exit and maximum near-term financial gains.

2. Marketing your practice — Clearly define practice and book characteristics

A sales memorandum is an extremely good way of promoting the sale of your practice. It summarizes all the important aspects of your practice including ownership, products and markets, assets and finances, and reasons for the sale. It is essentially the promotional literature you will use to support the sale, highlight the strengths of your business and present it in a positive way. A sales memorandum should include the following key components:

Practice memorandum

  • A business profile, including
    • A brief history
    • Your practice focus, investment philosophy, fee structures and billing models
    • An organizational chart of staff who may transfer with the sale
  • Client profiles segmented by
    • Age group
    • Geographic location
    • Assets in dollars, types of investments, plan types, persistency and client attrition risk
  • Business processes
    • Who performs the work
    • Charging methodology
    • The style, nature and strategies used in your financial and retirement planning
  • Marketing
    • Primary methods for procuring clients
    • Client service and retention methods
    • Literature and articles related to your business
  • Financials
    • Growth
    • Overhead
    • Projections of future income from existing business
    • Value justification

Book of business memorandum

  • Client profiles segmented by
    • Age group
    • Geographic location
    • Assets in dollars, types of investments, plan types, persistency and client attrition risk
  • Business processes including the style, nature and strategies used for your financial and retirement planning
  • Marketing, client service and retention methods
  • Financials including projections of future income from existing business and value justification

3. Valuation — What really drives value?

Most practitioners prefer to value their practices based on historical data, such as multiples of historical recurring revenue or assets under management, but these rules of thumb can be misleading. To obtain a true sense of your practice’s value, valuation should be based on three factors: transferability of the book of business or practice, cash flow and the reasonable potential for growth.

Ultimately, value depends on what is being transferred. The more consistent and predictable the form of income, the easier it is to obtain superior value for a successful transfer. The important distinction to make is whether you are transferring a book of business or the practice itself. Planning your exit in advance gives you the opportunity to assess whether or not your selling strategy will permit you to extract enough value to fund your retirement. In the event it will not, you have the advantage of time to work on improving the value of your practice or book of business.

Don’t underestimate the need to think about planning your exit strategy in advance. Understanding your personal objectives and your strategic alternatives will set the stage for your selling strategy and allow you the opportunity to increase the value of your practice or book of business to potential buyers. The end result is a successful exit defined by your priorities. Cindy Jenner Cowan is vice president of training and development at Worldsource Financial Management. With more than 17 years of experience in the financial services industry, the expert in relationship management and value-added coaching recently developed FRAMEWORKS, a training program for Worldsource advisors, focusing on advisory practice life cycles.

Cindy Jenner Cowan