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Succession Must-Have: Future Value

FP Transitions, Portland, Ore., is a professional business valuation firm with a message to financial practitioners. “You need recurring revenue to build future value into your practice.”

CEO Brad Bueermann speaks from experience. “FT has valued over 7,000 financial advisory practices in the past 15 years,” he said in an interview. These are primarily wealth management firms. FT also helps advisors develop transferable value in their firms, create succession plans and/or sell their practices on the open market, and has developed proprietary models for two big life insurers that support their practitioners with business valuation, succession and related matters.

Based on this, Bueermann has reached certain conclusions about valuations for insurance and financial advisory practices. For instance:

  • If you front-end the commissions on life policies, that’s a problem from a valuation standpoint. Many of these practices may have mined out the value and can’t predict the lapse rates, Bueermann explained.
     
  • Renewal streams are great, but many carriers don’t let the renewal stream be transferred to another agent. So valuing an insurance practice that uses such carriers is “tricky.”
     
  • The nature and extent of a firm’s customer service impacts value. “Does the firm service clients as a team? How recent is the business on the books? How many products are in the firm’s average household?” A practice with average product placement per family of 1.1 and average recency of nine years is less valuable than firms with a higher average placement and shorter recency metric, Bueermann said.

As for valuations, Bueermann thinks there is too much variation inside agencies and between agencies to make the multiple-of-revenues approach effective. For instance, commissioned business might have a nonrecurring revenue stream ranging from 0.3 to 1.5, while its recurring revenue stream might be 1.2 to 3.

In addition, he said, the valuation needs to take into account more detail. “Think about real estate value. If you base the value on average dollar per square foot, the result could be off wildly because the value depends so much on location.” It’s the same with advisory practices; the value depends on more than one factor.

Bueermann acknowledged that producers have a lot of anxiety around the best valuation approach to take. His firm’s solution is to look at the firm’s valuation in the context of merger and acquisition potential, and opportunities for succession planning.

He defines succession planning as “transitioning to second-generation owners who already work in the firm.” The successor would not necessarily be a family member; it could be a junior partner, for instance. The transition occurs over time, such as 10 or 15 years, during which time long-term goals are achieved, and other matters are tended to, such as how to create wealth for the owner in retirement. “We can capture the value with this managed approach in ways that we can’t when selling to outside buyers,” he said.

This approach is well-suited to insurance advisors, because many “never want to retire,” Bueermann said. If an insurance practitioner does sell, it’s often because the advisor needs or wants to work reduced hours. But with a succession plan, he continued, “The principal can scale back on ownership gradually, with the new owner gradually purchasing equity over several years, and the original owner becoming a minority partner. We’ve done 400 of these so far.”

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected] [email protected].


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