By: David Grau, Jr.
Valuation Director, FP Transitions

Financial professionals are on the front lines when it comes to dealing with the consequences of a weakened economy. As independent business owners, when the markets are down, it can feel like the value you have built up in your practice is at risk. More and more, advisors are starting to wonder how the current conditions are affecting the value of their practices.

The reality, however, might surprise you. The value of independent financial services businesses has actually risen over the last 24 months, with small increases at the “job/vocation” level, and the larger increases in value occurring at the mature “business” and “firm” level.

In fact, the average practice value has increased more than 6 percent in the last year. And, in some circumstances (depending on practice size and demographics), the increase in value has been as much as 35 percent, despite decreased assets/revenue. That’s not to say that there haven’t been adjustments in the open market due to the recent economy; transition risk is a significant contributor to a practice’s value, and buyers in today’s economy have risks and challenges that are outside their control. While buyers do recognize the increasing value of financial services practices, they are paying for them in a slightly different way than in years past.

Over the last year, FP Transitions has seen a decrease in down payment amounts, from an average of 36 percent of the purchase price in 2005-2006 to 29 percent in 2009. Buyers are accounting for the potential risk of the market through the use of contingent payment methods, like adjustable promissory notes and earn-outs, which have increased in use from an average 29 percent of the purchase price in 2005-2006 to 70 percent in 2009.

In addition, the mortgage issues that have troubled (and continue to trouble) the banking industry are resulting in an unexpected benefit for buyers and sellers of financial services practices. Faced with mortgage uncertainty, lenders are now looking for alternative investments, like acquisition loans in the financial services industry. Historically, bank financing has been nonexistent in this industry, but in the last 12 months, it is now becoming a more viable option for well-qualified buyers.

It’s not news to anyone that our economy has seen better days, but, as an independent financial advisor, you can take comfort in the knowledge that, as you continue to build and invest in your business, the value of your largest asset – your practice – will continue to rise, no matter what the stock market looks like.

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Business Transitions, LLC and CLS Investments, LLC are not affiliated.

1219-CLS-8/24/2010