The Advisor Client Partnership Program: Focus, Free up, Monetize
Focus on your top clients, Free up time, anD Monetize the rest of your business
Over the past few months, we have had conversations with six advisors considering selling part of their business. The reasons slightly varied, but there was a consistent theme: they were stretched too thin, and their clients, businesses, and, in some cases, their health were all negatively affected. These conversations are what led us to launch the Advisor Client Partnership Program, a way for advisors to focus on their top clients, free up their time, and monetize the rest of their business through a partial business sale.
What is the Advisor Client Partnership Program?
The program, at its simplest, is a partial business sale. In reviewing over 150 financial advisors’ businesses, we identified that, on average, 80% of their revenue came from 16% of their clients. These numbers were consistent whether the advisor generated over $1 million in revenue or $100k in revenue. This program allows an advisor to sell 5%, 10%, or even 20% of their revenue and, in doing so, also transition 85% of their clients to a new advisor. This not only frees up a significant amount of capacity for the advisor to focus on their top clients, but it also provides those clients being transitioned access to a firm/advisor with the capacity to serve them proactively.
Who is a fit for this program?
Two types of financial advisors may be a good fit for this program:
An advisor who has reached capacity in their business and is looking to refine and refocus their business, allowing them to grow more efficiently.
An advisor who is 3-5 years from fully retiring but would like to start to reduce some of their workload while also focusing on their top clients.
In both examples, the advisor is able to accomplish their goal, provide their clients with an enhanced level of service, and not reduce their revenue with a partial business sale.
What are some of the benefits for the advisor?
For the Advisor who has reached capacity, growth has slowed because they are spending too much time servicing clients who are no longer a fit for their business.
Capacity for Top Clients:
Refocused Growth:
Improved Service level for transitioning clients
By leveraging a partial business sale, the advisor can reset their practice, refocus their time and resources on their most valued clients, and transition other accounts to advisors better suited to serve them. This can help reignite growth and position their business for long-term success.
The advisor who is thinking about a succession plan wants to focus more on top clients and less on service work.
Time and Liability Reduction: Reduce the service work, lower liability, and free up more time to focus on their top clients.
Business Optimization: Make their business more attractive to a future buyer by increasing the average account size, reducing the number of clients, and maintaining similar revenue.
Improved Client Experience: Provide existing clients with access to a dedicated service advisor who can serve them and their future generations.
Monetization: Monetize a part of their business that would otherwise become a depreciating asset the longer it is left under-serviced.
Succession Planning: Use the partial sale process to evaluate potential successors for the rest of their business.
These benefits perfectly align with most advisors' visions: 3-5 years from Retirement, focus on top clients, reduce service work, monetize part of the business, and identify their long-term successor.
What are some benefits for the client?
A partial business sale can enhance the client experience for both the clients the advisor continues to work with and the clients the advisor decides to transfer to the new advisor.
Continued Clients: For the clients, the advisor will continue to work with, the advisor will immediately have freed up capacity, allowing them to enhance their service offering and create more value-added touch points throughout the year.
Transferred Clients: Clients who the advisor transfers to the new advisor now get a dedicated advisor who can provide them with an enhanced service model today and help guide them and future generations through their financial journey.
Future Planning: The last benefit to all the advisor's clients is that a partial business sale demonstrates that the advisor is planning for their future beyond their role as their advisor. Even if they haven't vocalized it, most clients wonder what will happen to their account when the advisor retires. A partial business sale is the first step in showing them the advisor is taking proactive measures to ensure they will be cared for beyond the advisor's tenure.
By freeing up time, providing dedicated advisors, and planning for the future, a partial business sale ultimately enhances the client experience for all the advisor's customers, both those the advisor continues to serve and those who transition to a new advisor. This can be a win-win scenario for the advisor and their entire client base.
What should a firm look for when considering a partial business sale?
It’s one thing to decide on a partial business sale that could be right for your business and clients; it is another to find the right partner to work with. When you start evaluating potential partners, there are four key considerations:
Expertise: The advisor should ensure the advisors at the firm they are considering have the necessary expertise to serve their clients. This could include wealth management experience, financial planning expertise, or product knowledge.
Capacity: Since the goal of this program is to provide the advisor's clients with a dedicated advisor to help serve them, the advisor wants to ensure the firm cannot only take on the clients they are transitioning but also seamlessly integrate them into their service model.
Capital: These deals are generally structured with a down payment and then an ongoing revenue share for a certain number of years. The firm the advisor is selling to needs to have the capital to pay them upfront and a robust process to track and pay the ongoing revenue share so the advisor can continue to monetize the business in the future.
Succession: The final consideration in evaluating a partnership for a partial business sale is whether this firm could be the ultimate successor for the rest of the advisor's business. This process is an excellent way for the advisor to evaluate the firm and its advisors to see if they are the right fit when the advisor decides to retire.
Overall, carefully vetting the firm's expertise, capacity, financial capabilities, and potential to be a long-term partner will help ensure a successful partial business sale that benefits both the advisor and their clients.
How do you structure a partial business sale?
As with any business sale, there are numerous ways to structure the deal. However, a few key deal components will help guide the overall structure of a partial sale: guaranteed vs. revenue share, deal length, and tax treatment of payments. When reviewing the business, the critical factors in determining the deal structure are the client demographics and the recurring revenue generated from the portion sold. In most cases, the recurring revenue is low (one of the reasons for the sale), but the future revenue potential is high.
Below are three different deal structure methodologies, using averages from the businesses that were analyzed, that incorporate different deal components:
EXAMPLE 1
This example would pay the seller 40% of the recurring revenue being generated as an upfront down payment and then a 50% revenue share on all future revenue for 5 years. This methodology provides the seller with a smaller percentage upfront but more future revenue opportunity with a 5-year earnout. While this option offers the most upside to the seller, it also has benefits to the buyer, as there is less in a guaranteed down payment, and the tax treatment of the ongoing payments is favorable.
EXAMPLE 2
This example would pay the seller 100% of the recurring revenue being generated as an upfront down payment and then a 50% revenue share on all future revenue for 3 years. This methodology provides the seller with a 1X recurring revenue as a down payment and the opportunity to participate in future revenue for 3 years. If revenue remained flat, the seller would receive approximately 2.3X the revenue sold, and with a 10% increase, they would receive 2.6X the revenue sold.
EXAMPLE 3
This example would pay the seller 150% of the recurring revenue generated in a one-time payment, which would be paid as goodwill (8594). While this method provides the lowest total payout, 1.5X recurring revenue, it does provide the seller with a one-time payment upfront with favorable tax treatment while providing the buyer with 100% of the upside. Generally, in these types of deals, there would be a contingency after 12 months to ensure recurring revenue performed as expected.
The goal of these types of partnerships is to transition these clients to a firm that will provide them with a dedicated advisor. This allows the firm to provide proactive advice and expand the relationship with the client, increasing revenue for the buyer and seller. That being said, for an advisor with a 3-year time frame before retirement, even if revenue remains flat, they can keep revenue the same while reducing the number of clients they are working with by 80-90%.
What does a transition process look like?
As with any client transition, it is important to customize the client transition plan to ensure the clients have the best possible experience and completely understand what you are doing and why it would benefit them. However, after doing a number of these transitions, we realized they all follow a similar path.
Weeks 1-4: Preparation and Initiation
Client Review: We work with the seller to Identify the clients that would be part of the sale, analyze the accounts and revenue, and create a proposal
Finalize Client List and Sign Asset Purchase Agreement: Confirm the final list of clients for the sale and sign the Asset Purchase Agreement.
Develop Client Communication Plan: Using sample letters, customize a client communication plan to inform the client about the changes and ensure they are informed and prepared for the transition.
Weeks 5-8: Execution and Closure
Distribute Client Communication: We would mail tailored letters to clients on behalf of the seller.
Submit and Monitor Account Reassignments: We would submit the account reassignment requests and track the entire process to ensure everything runs smoothly.
Client Integration: We would begin contacting clients to make introductions and create a positive transition experience.
Conclusion:
After multiple discussions with advisors on how they may want to transition into retirement, we started working on the concept of a partial business sale. However, as we reviewed the details of different businesses, where revenue was being generated, and how all clients could benefit from this type of program, it quickly became apparent this is a program that can help businesses and clients and begin the transition of clients to the next generation of financial advisors. The Advisor Client Partnership Program does precisely that, allowing advisors to focus on their top clients, free up their time, and monetize the rest of their business through a partial business sale.
If you have questions about how this program could help your business and clients, please feel free to reach out at any time to discuss; email sell@askifg.com or call 615-528-5725.