I asked Mike two simple questions: “If you left your business for two months, would it run by itself? Would it be able to grow on its own?”

His answer? “No.”

This highlights one of the biggest fallacies regarding the time when an advisor tries to sell his or her business. Most believe they can sell their business for cash and sail off into the sunset. Many advisor practices, however, are reliant on the business owner, making it very hard to sell.

Rather than a sellout, in almost every one of these situations, the purchase comes in the form of an “earn-out.” An earn-out, on the surface, is much like a sale. An investor gives you a cash multiple on your business. However, since it's an earn-out, the deal requires you to stay on as an employee for a minimum of two years or more. This effectively takes you from owning a business that you built to working as an employee in the business you built but no longer own, which is far different from being retired.

A sale, on the other hand, gives a business owner a nice payout and no obligation to stay on as staff. So how can you build a successful advisory practice that gives you the option to get a real sale when it's time to retire, as opposed to an earn-out?

Building a sellable business

One of the biggest issues with an insurance agent's practice is that many advisors focus on cash flow but forget about equity valuation. It's a service-based business, so this is natural. But in order to create a sellable business, you need to focus on cash flow and overall equity.

You essentially need to create a well-oiled machine that can run without you.

Here are seven things I suggest in order to create a business that sells, rather than one that earns out:

1. Delegate operations. Your financial advisory firm needs to be able to operate without you being there. This means that you need to better train your employees to handle all of the responsibilities within your office. You've got to wean your business off of its dependence on you, and every other employee as well. You more than likely will need to hire additional employees in order to do this.

2. Build out processes. In addition to better training your team, you've got to build out and document your processes. Your processes should be so clear that if any one employee left, another employee could easily step in without having to reinvent the wheel. This gives potential buyers confidence that your business is resting solely on your shoulders, or the shoulders of any single employee.

3. Set up a solid sales team. Many advisor sales come 100% from them, and no one else. This is not the making of a sellable business. Instead, focus on creating a sales team that can bring in the lion's share of revenue so that your business can not only operate but grow when you are gone. Again, your sales process needs to be easy enough to follow so that a new owner could bring in fresh sales people to follow it and succeed.

4. Know your niche. Many advisors build a business where they are the “jack of all trades” and handle every little thing a client needs. To maximize the value of your business, however, you are better off focusing on one or two areas that your business can do really well. It's much easier to duplicate your process with others this way, and it also increases the quality of the work you do as you can train and hire specialists as opposed to generalists.

5. Your numbers are golden. You need to measure and track all of your numbers in order to sell your business. You need to be able to show real cash flow. You should be able to show the cost of acquiring new clients, as well as the sales ratios. If a new owner were to invest $100,000 in marketing in your business, with your processes built, they should have a reasonable expectation regarding the amount of revenue that investment would generate. All of these are things that a potential buyer will want to know in order to take buying your business seriously.

6. Establish high-volume, reoccurring revenue. Is your business built solely on up-front commission sales, or do you have recurring revenue that comes in each and every year? In order to maximize the value of your business, you've got to have ongoing revenue. The bigger your business is, and the more ongoing revenue you have, the more attractive it is to the potential buyer, which will increase your valuation.

7. Diversify your client base. You also need to ensure that your business is diversified among a variety of clients. If 35% of your revenue comes from one client relationship, it's going to be discounted. This is a perfect example of the success of your business being dependent on one person.