Business or Practice? The Critical Question RIAs Must Ask

In recent years, thoughtful succession planning has become a top priority for many RIAs. This strategic step is not just about ensuring business continuity; it’s fundamentally about safeguarding clients’ interests, preserving the firm’s value and securing the advisor’s legacy.

But before an RIA begins to think about a succession plan, whether internal or external, the advisor needs to first carefully examine what form or structure the current financial enterprise possesses. Better put, it’s crucial to determine whether future owners perceive the RIA as a business or a practice.

Based on my experience working with independent RIAs, the reality is that the vast majority of them are practices, not businesses. And there is a big difference between the two. Addressing and understanding this question is paramount, as it will affect the valuation and the transition process.

The key delta between a business and a practice is that a business has the right people, in the right seats, doing the right things. Consider the fundamental tasks that any business must undertake: It must create an annual written strategic business plan, monitor key performance metrics, build a culture to attract and maintain exceptional talent, manage a team, adopt innovative thinking, engage skilled leaders, optimize efficient and repeatable processes and create rich client experiences.

And these are just some of the principled actions that a firm must perform to function as a credible business.

RIAs that genuinely function as businesses are dynamic and thriving. And that is what acquiring firms are looking for — the degree to which a firm operates as a business stands to have a sizeable impact on the valuation. This can have positive effects on internal succession plans as well.

Businesses tend to achieve higher valuations as they grow faster, operate more efficiently, scale themselves with well-designed processes and deliver more satisfying client experiences. So, when it comes time to monetize a lifetime of hard work, a business will always be of greater value than a financial practice. We are not impugning owners of financial practices, but there are clear advantages of operating a financial enterprise as a business.

For firms contemplating succession planning or exploring acquisition options, here are a few considerations to help them determine whether they operate as a business or a practice. We’ll also provide guidance on the steps required to prepare for a smooth transition.  

Start With an Appraisal

If a business is contemplating selling, the first step is to conduct an appraisal. This will also offer clues as to whether the entity in question is more of a business or a practice.

For example, let’s take processes. Does the firm have its process for billing and onboarding clients codified and documented? If the firm hires someone new, is it equipped to handle the business’ core functions? The answers can help a firm better understand where it sits on the spectrum and will have an impact on its evaluation.