4 keys to preparing your firm for a transaction

Pat McClain, my business partner of 30 years, has repeatedly told me that we should prep our business for sale even if we have no intention of doing so.  

His reminders always prompt me to think about an old neighbor of mine who set about fixing up his house for sale. He had the place painted, replaced the floors and carpets, and put on a new roof. When he had completed all the projects, he said to his wife, “It’s so nice, I don’t want to sell it now.”

It’s the same principle with your advisory firm: Get it running on all cylinders so it’s everything you want it to be and so you can more thoroughly appreciate it.

Another important reason it’s wise to prepare your firm for sale is that you might just suddenly find the perfect partner to merge with or sell to.

Here are four ways to get your practice running smoothly and, should the opportunity arise, ready for a transaction.

First, have your books audited. I’m amazed at how few firms take the time to do a basic audit. Granted, it takes work, but having your books audited by a reputable accounting firm will instill a great deal of confidence if anyone ever wants to review your financials.

Next, keep track of your net flows. Most advisory firms do a poor job of tracking how many clients joined them each year and how many left. Further, they fail to keep track of how many assets transferred in versus transferred out, either via withdrawals or termination. Knowing the facts about the health of your business will not only be valuable to prospective buyers, but is beneficial to you, as well. If you find your firm isn’t growing (most small and medium-sized advisory firms aren’t), you’ll have a good baseline from which to measure the success of any efforts you undertake to grow.

Then separate your business expenses from your personal expenses. Having nonbusiness-related expenses paid for by your firm is simply a bad idea. I once saw someone deducting the storage facility for their motor home. The excuse was that they might use the motor home to visit clients. Any deductions that you are taking that aren’t legitimate business expenses are not only wrong, but they will cause a buyer to question your integrity and business acumen.

Lastly, pay yourself a salary. If you can determine a fair market wage for yourself (such as a replacement wage), take this in the form of a salary. You can distribute any excess profits each quarter, but it’s much easier to identify the true value of your firm if you already know what your salary should be.

By going through these exercises, you’ll be in great shape should you suddenly need to sell your firm due to a health issue. And even if you don’t sell for years, you’ll be running a better business.

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Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.