In my nearly decade career as a financial advisor, I’ve purchased several books of business of varying sizes. Here are the top 5 things I’ve learned to retain & grow the business while delighting your new clientele and while not disrupting your existing clientele.
i). Client demographics – how old are the clients? What is their occupation? Where are they located?
ii). Client dynamics – are certain relationships in the book centers of influence?
iii). Exiting advisor relationship – when was the last meeting? What was discussed?
i). Understand the book and client service model. You’ll want to ensure you can meet or exceed what the clients received previously. Clients typically grow to expect certain things and you want to make sure that you can continue the traditions of the previous advisor. Ex: birthday cards, client appreciation events, annual meetings, quarterly check ins etc
ii). Has compliance been a concern with the advisor? Are you purchasing any unhappy clients that may be a risk to your business?
iii). What is the quality of the notes of the exiting advisor?
As much as adding new clients to your business can be exciting, you’ll want to ensure you know what you’re buying and that you’re the best advisor for the opportunity.
Multiples for books of business can vary but usually are between 1-3x gross revenue. Factors that can affect this include: quality of the clients, quality of the notes, payment schedule etc. If an exiting advisor is in a rush (or if it’s an estate sale), this will likely impact the percentage of clients that stick and the sale price. In an ideal scenario, half of the sale price is paid up front, with the remaining paid the following year based on retention of client assets.
Will you be sending letters out to clients during the transition? Will the exiting advisor participate in joint transition meetings with you? I’ve had a great deal of success using Calendly & AdvisorFlow to book meetings and gather basic client details. Often, a change for a client means an opportunity to revisit their financial planning as they evaluate the new relationship. If you can remove friction for the transition process (reduce the number of clicks), you will increase the likelihood you get that first meeting and have the opportunity to establish yourself as their new trusted advisor.
Remember, not everything is a function of value! There are cultural issues, practice management issues, transitional and legal complications and the structure of the deal all affect your future financial success. While supporting advisor transitions and supporting home offices all across North America, here are some things Roland and the FindBob team will help buyers navigate the acquisition process:
You need to understand which types of practices you want to acquire and why. Where do you want them to be located? What is the makeup of their client base and what sorts of products do they sell? Once you zero in on the optimal business to enhance yours, the process of searching for targets becomes a lot clearer and you can easily come up with the Alignment questions Brandon shares above.
Many folks believe that valuations are irrelevant and that the market dictates price. To a large extent that is true! Buyers are paying multiples but do the prices reflect prudent business choices? If you use rules of thumb rather than sound valuation, you’re effectively assigning relatively equal value to all businesses regardless of the quality of all the things you’ve uncovered on income, client base and cost of doing business that Brandon points out. So take the time to understand the various valuation approaches like the income-based Discounted Cash Flow method. Sure you may end up paying based on a multiple of revenue, but as a business person it behooves you to know what exactly goes into the price you’re paying and what you’re actually buying.
Don’t approach prospective sellers unprepared. Remember that they’re just as, if not moreso, discriminating as you are. Be prepared to disclose broad aspects of your acquisition strategy and fundamentals of your current business. You want to elicit meaningful comments and observations from sellers. So have a consistent, standardized description of your business and be ready to articulate the transition plan, like the one Brandon describes, at each initial meeting. I’ve found that when buyers open up to sellers before they start asking them pertinent information about their own business it can help establish trust and assist you in obtaining useful insights during your preliminary due diligence.
As part of your due diligence, you should also be doing a cash flow analysis to understand your margins and determine your break-even point. Determining your break-even point is critical in evaluating whether the purchase price is reasonable and if this is the right opportunity for you to pursue. Terms can have a dramatic impact here too. Are you doing an all cash deal? Are you financing? If so, what’s the debt-service ratio? Is there an earn-out? Is it fixed or milestone-based? This is one of the reasons why terms can often be more important than price.
Brandon hits it on the head when he says to take your time. If you decide you do not have the courage or have implemented an effective strategy clear enough to expand through acquisition that’s OK! You have not lost the opportunity to grow. Turn your attention inward and commit your resources to your practice and yourself, you may be able to achieve the same financial heights and professional satisfaction without all the risk that goes with paying for someone else’s practice.
Whether you choose to grow your business organically or by acquisition, I hope these tips help. Did we miss anything? Please let me know down in the comments or if you have any additional questions, please let us know.
