Do-over Exit?

Do-over Exit?

Chia-Li Chien, PhD, CFP®, PMP®, May 13, 2019

My father-in-law retired in the late 1980s when he exited his successful restaurant business. In a Chinese American family, a daughter-in-law like myself only gets to listen to stories but not to express my opinions. He was one of four partners in this premier restaurant. In its heyday, celebrities and politicians such as governors dined there. He sold his shares to one of the partners in the amount that equated to his original investment in the business. He owned 30% of the business, and his original investment was $60,000 in the early 1970s. The math did not work for me, and I felt someone took advantage of my father-in-law. What if he could do-over his exit? But can he?

Approximately one-third of U.S. businesses exit by selling to third-parties, one-third transfer internally like my father-in-law, and the rest simply close without cashing out (Chien, 2010). The financial planning practice is no different than any other business in the U.S. On average 73% of the financial planning firms do not have a succession plan (Chien, 2017), but that may not be a fair statement because it depends on what type of financial planning practice you have. In the financial planning industry, 70% of firms are sole practitioners, 25% are silo practitioners, and 5% are ensembles. Sole practitioners need an exit plan—selling to a third party—not a succession plan. A succession plan is to transfer internally or externally, depending on the situation (Chien, 2017).

Let’s set aside the types of financial planning practices for a moment and focus on the business model first. I work with many business owners first to review and update their business model before we talk about the succession or exit planning. Without a strategic direction of the business, it’s meaningless to structure succession or exit planning. Let’s focus on the type of revenue streams in financial planning practices today. On average in the financial planning industry, 88.4% of the revenue is asset management fees (InvestmentNews, 2018). Here is the breakdown of each type of the revenue stream from the 2018 InvestmentNews Study of Pricing & Profitability.

How do the types of revenue stream correlate to the selling price? Or do they not? Here is a list of the rules of thumb for exit/succession payouts that I found in my study (Chien, 2017):

Which one should you use for your financial planning practice?

But before we get there, ask yourself, “What makes real estate valuable?” I bet your answer is “location, location, and location!” You are right! Next, “What makes a business valuable?” Well, in my experience, many tell me profit, revenue, people, etc. The reality is “timing, timing, and timing.”

Personal timing is the readiness of the owner to move on to something else. Business timing is that there is a substantial key management team able to operate with or without the owner or founder. Finally, the economic timing is where you are in the economic cycle and is it a buyer’s market?

Unfortunately, without proper planning, timing may not be on your side when you desperately need to get out of your business. Let’s assume you practice what you preach to your clients about comprehensive planning. You do take time to plan and implement areas in your business to increase your business equity value. Let’s quickly review what actions will affect the business equity value. In general, there are three areas: 1) reduce business risk; 2) employ additional high yielding capital; and 3) increase recast EBITDA. Please refer to my book (Chien, 2012) for details. I will review a few simple actions here.

To reduce business risk, the owner needs to pay attention to its customer concentration. Similar to how you teach your clients about diversification in their investment portfolio, you too need to diversify your clients. For example, many near retirement financial planning practitioners have a large concentration in clients who are in the age group of the 70 and above. These aging assets may fall off the book of business if not carefully replaced with a younger age group of clients. Hence, increase your business risk.

The simplest action for financial planning practitioners to employ high yielding capital is to invest in human capital or hiring the right talents. We are in the people business. You need the right talent pool in your business. The cost of the learning curve, not to mention the cost to find the right talent, can further delay your growth in business equity. Plus, you don’t even know if someone you just hired will work or not. Many told me that they did not have a good experience and wasted time and money bringing someone in.

Last but not least, to increase the recast EBITDA effectively is to control cost. To have better control of the operating expenses is to streamline your process. From prospecting to implementation, what does the process map at 30,000 feet look like compared to the ground floor that has minimum waste and smooth integration within your operation?

All of these will end up in “adjustments” that impact the final selling price of your financial planning practice. Here is the list of adjustments that I found from my research (Chien, 2017):

Did I mention that the revenue size of your practice is positively correlated with the selling multiples of the sales revenue (Chien, 2017)? The larger the revenue of your practice, the more multiples of the gross revenue in the exit valuation. Additionally, whether you are buying or selling will determine the type of appraiser to create a favorable selling price for you.

What should you do in your practice to grow your business equity value? First, decide which sandbox you want to play in. Is it a solo, silo, or ensemble practice? Here is a table that provides some guidelines (InvestmentNews, 2019). Please remember, ensemble practices share clients, revenue and operations, unlike the silo business that only shares operations.

Your team structure is comprised of several different roles that include lead advisor, service advisor, associate advisor, analyst, etc. (CFP, 2019). You have a compensation structure comprised of base salary, bonus, and benefits. The CFP board (CFP, 2019) recently provided some guideline on the bonus and compensation range structure based on the role. In the Los Angeles metro area of California, the median base salary of a CFP is $102,744 with an incentive of $16,502 and perks of $10,210 (InvestmentNews, 2019).

However, I recommend that financial planning practitioners consider the structure of their practice in the following:

• Have a distinct function of the front office and back office where the front office masters the sales and marketing. Streamline the back office with an efficient process to move clients through different stages of the planning.

• Consider having equity and management tracks for your talent pool. Some of your employees are not interested in your equity share regardless of if they are control or non-control shares. Separate lead/service advisors into either an equity partner track or management track so they can excel in their own ways.

• Last but not least, have an internship pool comprised of two major categories: 1) career-changer or returner-to-work and 2) near-graduates. Many practitioners tell me that they don’t have the time to train them. Who says that you have to train them? Ladder them. Let them come up with the internship operational manual. Let senior interns manage the junior interns, etc. Observe them to see if they are a good culture and strategic fit for your firm. Partner with a university like California Lutheran University to design, structure, and manage your internship pool.

I don’t believe my father-in-law gets to re-do his exit. I don’t want to see any financial planning practitioners having to re-do an exit regardless of how they sold their practice—internally or externally. Why not do it right once to enjoy your retirement and expand the profession through your talent pool? The cost of doing nothing could potentially dent your retirement. The choice is yours!


Chien, C.-L. (2010). Show Me The Money. Bloomington: iUniverse.

Chien, C.-L. (2012). Work Toward Reward: Building Business Value Today for a Well-Deserved Future. Bloomington: iUniverse.

Chien, C.-L. (2017). Selling a planning practice: The relationship between revenue multiple and revenue size. Journal of Financial Planning, 30(3), 52-61.

InvestmentNews. (2018). 2018 InvestmentNews Study of Pricing & Profitability: Benchmarking the Financial Performance Study of Advisory Firms. Retrieved from InvestmentNews Adviser Research Dashboard: InvestmentNews Study of Pricing Profitability_v1.pdf

InvestmentNews. (2019, Feb 11). 2018 InvestmentNews Compensation & Staffing Study. Retrieved from InvestmentNews Adviser Research Dashboard:

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