Imagine yourself at the end of your career. You just sold your advisory practice and are counting on the proceeds for your retirement.

The person who bought your book promptly doubles the cash flow after you leave. This, obviously, doubles the value of the practice, which means you basically just sold at 50 cents on the dollar. How would this make you feel? Is this really possible?

Unfortunately it is. In fact, it happens more often than you think because most advisors don't have a written exit strategy for their practices. Consider this: If I asked you the value of your business as an asset, could you tell me?

One job of a CEO is to raise the stock price for shareholders. Advisors are the CEOs of their practices and if their businesses had a share price, many would not know what it is (until it's too late.)

But there are steps you can take now to capture maximum value for your practice when the day comes that you decide to leave.

The first order of business is to determine if you are even allowed to sell your practice.

BECOME A POLICY WONK
In my line of work, I interact with two types of bank advisors. If you are essentially an independent advisor conducting business within the bank, you most likely can sell your practice (although the bank may have a say in who will succeed you).

They will understandably want their clients to receive the type of service they have grown accustomed to and want to feel confident that your successor will provide that.

If you are an employee of the bank, however, things get sticky. It's less likely that you'll be able to sell your practice. In those cases, in the bank's eyes, your client relationships belong to them. And bank management will not want to see those clients leave the bank.

Indeed, at some banks, advisors are expected to just leave without a complaint after their 20 or 30 years of service. But others have established official programs for succession planning and will even help finance the buyer of your practice.

VALUATION FORMULA
Given that banks vary greatly, it is up to you to learn your bank's succession planning policy as soon as possible.

Once you've established a road map of how you will exit your practice, you need to determine its value.

Buyers are interested in the cash flow your business generates, so the higher the cash flow the higher the value. Cash flow is usually divided into recurring and nonrecurring types.

The most common way to value a bank advisory practice is to use a multiple based on recurring revenue. The standard in the financial services industry is to use a multiple of 2.1 for recurring revenue and 1.1 for nonrecurring revenue. This can be applied to the revenue of the trailing 12 months or the average of the last three years.

Of course, the value of a practice in this industry depends on the value of client relationships-both quality and quantity.

As for the quality of the relationships, consider these questions: Will the clients stay with the new advisor or leave? Are the assets being managed in a style that is easy to transfer to the buyer or in a style nearly impossible to replicate?

On the quantity side of the equation: Would you rather buy a $50 million practice that boasted 50 accounts averaging $1 million in size, or 1,000 accounts of $50,000 each?

Then there are other, purely financial, considerations? Will the buyer be paying cash up front or making a down payment and financing the rest in installment payments?

All these moving parts create some difficult questions that need to be answered to establish the value of your business.

This is exactly why you need to begin planning your exit as soon as possible and building value creation into your business well in advance of transitioning out of it.

BOOST THE VALUE
There are several ways to boost the value of your practice.

Begin by developing a current standard operating procedures manual, which takes time to prepare but is incredibly valuable. This manual is your secret sauce. I have known advisors who have sold their systems as a separate asset.

In essence this is how you ensure that your clients will continue to receive your style of service and not jump ship after six months.

You can also increase the value of your practice by transitioning to fee-based business.

The first step is to identify which clients could benefit by moving from a commission-based model (nonrecurring revenue) to a fee-based one (typically a wrap program).

How you set your fees is a broad topic but in general, fees should be based on services provided rather than on the size of the account. Too many advisors price their businesses like mutual fund breakpoints. You're not a mutual find and if you are offering premium value, you should charge premium fees. If you're not offering premium value, offer a discount. (You can offer both.)

After planning for the expected, you also need to plan for the unexpected. Have a buy-sell agreement in place and possibly key-man life insurance in case of the unexpected. Have your potential successor lined up at least two years in advance or possibly more.

Remember, you are only going to exit your practice once. Don't make the mistake of selling too low to capture the full value you have created.

Todd Colbeck is president of Colbeck Coaching Group. He can be reahed at todd.colbeck@ccgcoaching.com.