Practice succession for financial advisors.

1. Succession Strategies for Financial Advisors Paul R. Brown, M.A. Managing Principal BROWNSTONE Capital Advisors LLC www.brownstonecap.com

3. Continuation of the Advisor

4. Client Transition

5. Loyal Staff is Protected

6. Business Legacywww.brownstonecap.com

7. Four Critical Pieces What Does My Practice Look Like? How Do I Create Transferable Value? What Determines the Value? How Do I Make the Transition? www.brownstonecap.com

8. First Piece: What Does it Look Like? Look

10. How dependent is the practice on ME?

11. There are many exit strategies

12. Selling a practice = transferring opportunity

13. A buyer weighs time, cost, and riskwww.brownstonecap.com

14. Seven Factors Driving Value Transferable book of business Consistent growth Future investable assets Not entirely dependent on the owner Fair level of compensation Recurring income Financial planning retainers www.brownstonecap.com

16. Bored, tired, distracted

17. Unsatisfied with the results

18. Unsolicited purchase offer

19. Merge with a larger practice

20. Other non-business reasonwww.brownstonecap.com

22. Future earnings and cash flow

23. The practice identity

24. Tangible assetswww.brownstonecap.com

26. An associate

27. Someone you share office space with www.brownstonecap.com

29. Two Critical Elements Is there fair compensation for labor? Is there fair reward for ownership? www.brownstonecap.com

31. Expanding their practice

32. Economies of scale

33. Financial and operating leverage

34. Building value

35. Egowww.brownstonecap.com

37. Future earnings and distributions

38. Market share and/or position

39. Existing staff

40. Assets

41. Unique processeswww.brownstonecap.com

44. Does it compliment my existing practice?www.brownstonecap.com

45. First Piece: The Buyer’s View Why are they buying? What are they buying? Is this a right fit? Can I manage a larger practice? www.brownstonecap.com

47. Commission income (trails) may transfer

48. Goodwill typically will not countwww.brownstonecap.com

49. Second Piece: How do I Create Value? Look Build

50. Key Elements of a Transferable Practice Customer Succession Management Succession Ownership Succession www.brownstonecap.com

51. Customer Succession Definition of Client Succession: The transition of clients from one advisor to another in a manner that increases their investment and fee based activity. www.brownstonecap.com

53. Client-focused practicewww.brownstonecap.com

55. What do your clients want?

56. What skills and services do you need to offer?

57. Which clients are at risk of leaving?

58. Which clients can you replicate?www.brownstonecap.com

59. Management Succession Definition of Management Succession: Creating an advisory practice model in which the ownership of the practice will naturally and predictably be transferred to others sharing the client management responsibilities. www.brownstonecap.com

60. Management Succession Design the Right Organization Which organization creates the most value? www.brownstonecap.com

61. Management Succession The SOLO Practice www.brownstonecap.com

62. Management Succession The ENSEMBLE Practice www.brownstonecap.com

63. Management Succession Lead Advisor Lead Advisor Assoc. Assoc. Assoc. Assoc. Assoc. Assoc. The LEVERAGED Practice www.brownstonecap.com

64. Management Succession $1,000,000 $762,287 $750,000 $384,900 $500,000 $250,000 $- Solos Ensembles The Median Income Per Owner www.brownstonecap.com

65. Management Succession Build the Right Team www.brownstonecap.com

67. Demonstrated Skills

68. Demonstrated Abilitieswww.brownstonecap.com

70. Occupational interests

71. Behavioral traits

72. Job fitwww.brownstonecap.com

74. Goals are realize

75. Value is achieved

76. Successor is in place

77. Timing is on your termswww.brownstonecap.com

78. Third Piece: How Is Value Determined? Look Build Value

81. A valuation for tax, divorce or litigation purposes could result in a conclusion different than the value of a practice for purchase or sale. Standards of Value

82. Special Industry Approach Gross Revenue x Multiplier or Managed Assets x % = VALUE www.brownstonecap.com

83. Special Industry Approach Special Industry Approach = “Rule of Thumb.” The “rule of thumb” for an industry is a multiple of gross revenue or a percentage of assets under management.

84. Special Industry Approach For financial planning, insurance and investment advisory practices, you often hear the rule of thumb value is somewhere between 1 and 4 times gross revenue, or between 1 and 2% of assets under management.

85. Special Industry Approach Rules of thumb are not reliable! They do not recognize the true economics or characteristics of a particular practice. The rule of thumb, or “special industry approach,” may serve as a check against the actual value, but should not be relied upon solely.

86. Valuation Approaches Asset-Based Approach Income Approach Market Approach

88. Asset Approach: Book Value The asset approach refers to balance sheet assets not assets under management. The asset approach is not likely to have much weight in valuing a financial advisory practice because most advisory practices do not have much in the way of tangible assets, accounts receivables or work in process (WIP).

89. Income Approach Adjusted Cash Flow Capitalization Rate = VALUE www.brownstonecap.com

90. Income Approach The income approach focuses on the income generating capacity of a book of business. It considers three factors: financial return, risk and growth.

91. Special Issues Any other approaches to valuation are variations of one of these three. When considering the income approach to valuation for the purpose of facilitating the sale of a practice that is for sale, a fourth key element must be factored into the valuation: the transferability of the book of business

92. Adjusted Profit Before Tax Revenue (Gross income from the practice) - Direct Expenses = Gross Profit - Overhead Expenses = Adjusted Profit Before Tax www.brownstonecap.com

93. Adjusted Free Cash Flow Adjusted Profit Before Tax + Non Cash Expenses (Depreciation/Amortization) +/- Working Capital Changes - Normalized Capital Expenditures = Free Cash Flow + Interest Expense x Tax Rate = Adjusted Free Cash Flow (Financial Return) www.brownstonecap.com

94. Adjusted Free Cash Flow - Adjustments Compensation (reduce owners’ compensation to the market level for a local salaried professional planner) Travel & Entertainment Non-business related legal expenses Certain support staff salaries Taxes applied to adjusted earnings

95. Adjusted Free Cash Flow As a guideline, overhead expenses should rarely exceed 40% of practice revenue, and preferably considerably less.

98. Volatility or stability of the Adjusted Free Cash Flow

99. Amount and quality of competition

100. Size of the practice

101. Condition of the local economy

102. Quality and nature of the book of business

105. Example: From an expected return of 30% (average) the growth rate of 5% (perpetual) is subtracted. 30% (Expected return) - 5% (Perpetual growth rate) = 25% (Capitalization Rate)

106. Fourth Piece: How Do I Transition? Look Build Value Transition

107. Four Things the Seller Must Do When Negotiating or Closing a Sale the Seller Must Do Four Things: Negotiate the Definitive Purchase Agreement Maintain Momentum Maintain Control of the Process Continue Managing and Growing the Business www.brownstonecap.com

108. Critical Factors : Terms of the Sale 1. Asset Purchase or Consulting Agreement www.brownstonecap.com

109. Asset Purchase vs. Consulting Purchase www.brownstonecap.com

110. Critical Factors : Terms of the Sale Asset Purchase or Consulting Agreement Non-compete Agreements Buy/Back Provisions Representation and Warranties Earn-outs www.brownstonecap.com