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THE PSYCHOLOGY OF ADVICE- Buy, Sell, Hold. or Fold?

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What will your client list and revenue stream look like next year? More and more advisors are thinking like asset managers these days, with their own practices as the asset in question. Would it be more productive to buy another firm and its clients, or merge with a practice of equal size? If you sold, would an outright purchase be better than an earnout? What price-revenue multiple could you expect?

Deciding whether to buy, sell, hold, or fold is more than just a numbers game. As David Drucker, an Albuquerque financial planner and editor of the online Virtual Office News, has pointed out, “A successful transition isn’t simply a matter of finding someone with the right amount of cash, consummating the deal and walking away. You need to spend at least as much time analyzing personalities as you do the numbers.”

As a psychotherapist and as a coach, I couldn’t agree more with Dave, who is also a principal in Practice Merger Consultants, Ltd. (, an excellent resource for advisors contemplating a transition. Here are some of the people-centered dilemmas you may encounter in a buy-sell-merge situation.

After more than 15 years as a sole practitioner, I want to spend more time with my family and pursue other interests. Although hiring two part-time workers has eased some of the immediate pressure, I was intrigued by a recent seminar on selling a practice. I’d like to get more value from my business, but how can I make sure I’m not going off in the wrong direction? The first and most important thing to do is to sort out your goals and needs. I recommend that you perform this self-assessment in writing. Consider questions like these:

o What do I enjoy most about my work?

o In what part of my job do I feel most gifted?

o To what extent do I want to keep on working? How many hours a week? How much responsibility?

o To what extent am I ready to step down and pass along the business to others?

o What would I gain from this transition?

o What legacy from my firm, if any, would I like to see passed on?

At advisor meetings and conferences, look for colleagues who have sold a business, merged, or created a complementary relationship with another company, and find out the pros and cons of their transactions. I would also recommend FP Transitions (, an online marketplace for buyers and sellers of financial practices, where you may find information that will clarify your thinking. There are other sources of information, too, including Schwab’s Advisor Transition Support service ( Mark Tibergien regularly writes on the topic for this magazine as well (see page 45).

It can take a while to identify what you want and don’t want, but the time will be well spent. The knowledge you glean yourself, and what you gain from others who have been through this experience, will simplify the decision process and make your ultimate choice more trustworthy.

After building a successful planning practice, my two partners and I are considering merging with an insurance firm. Our small staff is nervous about this, since the other company believes in individual accountability instead of our method of consensus decision-making. Is this anything to be concerned about? I’m glad you’ve found out at an early stage about this potentially disruptive difference in operating styles. It indicates that you and your insurance counterparts may need to make time for more due diligence on each other’s corporate personas. Is there good chemistry between you? If you have shared clients in the past, has it gone well?

If both parties agree that the answers are “Yes,” you might consider getting together at a facilitated retreat to brainstorm ways of working out the cultural differences between your two firms. Try to honor both companies’ basic values in this process. For example, maybe the post-merger compensation structure can be designed to reward both individual leadership and team effort.

In “work marriages,” as in personal relationships, the most important indicators of success may be good will and open communication. As therapists say, the degree of harmony in a marriage doesn’t depend on how dissimilar the two partners are, but on how they view these dissimilarities. The more empathetic and nonjudgmental each one is about the other’s differences, the better the relationship is likely to be.

Now that my partner and I have made plans to retire, we’re being flooded with advice about selling our practice. But we would just as soon close down gracefully and refer our clients to colleagues we trust. Are we bonkers? If you and your partner are sure that you have enough money saved for your retirement, I don’t see any reason not to do what feels right to you.

I would take time to be certain your decision is really based on principle, however, not on avoidance of a task you fear will be onerous. A little online research can suggest what selling your business would involve. If you’re confirmed in believing it’s not for you, you can close down your practice with no regrets.

Not many of us are wise enough to know “how much is enough.” More power to the two of you!

My revenue has been stagnant for the past couple of years, and I’m thinking of buying another financial firm to expand. Is it better to buy the whole business or just the client list? What pitfalls should I avoid? Although I’m not a business strategist, I believe you first should define why you want to grow. Is it to have a higher profile in the marketplace? To offer a wider range of services? Or simply to earn more personal income?

Buying a book of business is generally less expensive, but won’t include the other firm’s capabilities or assets. When you purchase an entire business, you generally take on its employees, systems, assets, and liabilities–a much more complicated proposition. Tiburon Strategic Advisors ( published a report in September 2002–”Trends in Succession Planning, Firm Valuations & the Growing Acquisition Market for Financial Advisors”–that may help you resolve what you’re looking for. You can also scout online for firms for sale at the FP Transitions and Schwab Transition Web sites.

When you’re deciding on a business to buy, the compatibility of corporate styles or cultures should be high on your priority list. Another key criterion is the “fit” of your employees’ personalities and values with those of the other group.

I also feel it’s vital to ensure that as many as possible of your colleagues and employees are onboard with this proposed major change. Periodic retreats–initially with your present staff, and eventually including employees of the firm you propose to buy–can clarify whether you will have the necessary support to weather the transition successfully. Even if you plan only to acquire a book of business, you will probably want to meet with the firm’s principals to see how they’ve handled their clients. These close encounters can help you decide if a company is really a good fit with yours, thus avoiding one of the biggest potential pitfalls of all.

Although I’ve run my business profitably for several years, I have been divorced twice and am now separated, which testifies to my lousy character judgment. I’ve recently been in discussions with another planner about merging our practices. The numbers look promising, and the chemistry seems to be good between us, but how can I be sure I’m picking a partner who will be right for me? Don’t be too hard on yourself. You may well have learned more over the years than you think. In fact, I would recommend thinking of other partnerships in your life that either worked or failed, and identifying the signs that first told you which way they were headed. See if any of these positive or negative signs are present with your prospective merger partner.

At the same time, you may want to enlist the help of a colleague whom you trust as a judge of character. Ask this colleague to meet with the other planner separately as well as with the two of you together. This third-party assessment should improve your chances of making a wise decision.

Finally, if you choose to go ahead, do it in a provisional way that allows you to test the relationship and its costs and benefits. For example, you might agree to a joint venture that could be dissolved by mutual consent or progress to a merger in a year or two.

My large planning firm is doing well, and my business consultant has been urging me to use some of our reserves to expand by buying other practices. While I understand the financial merits of this idea, I’m extremely reluctant to move ahead right now. How can I be sure I’m looking at this opportunity objectively, and not just stuck in a comfortable rut? To everything there is a season, as the Byrds once sang (quoting Ecclesiastes 3), and it seems to you this isn’t the right season for a change. Do you feel you need a period of rest before considering expansion? Or is your consultant looking way over the horizon while you’re focusing on the shorter term?

If you’re feeling pressured by our culture’s emphasis on nonstop work and productivity, you may want to discuss with your consultant the importance of taking time to enjoy your gains. On the other hand, if you are by nature resistant to change, it could enhance your own personal growth to “practice the nonhabitual.” Try on some different scenarios to expand your firm’s expertise, client base, and profitability–not just buying a business, but merging or collaborating in some way. If you take time to explore your motivations and options without committing to anything, you’ll eventually figure out the best way to proceed.

When confronted with expansion or divestiture, consider all the angles and remember the importance of corporate culture. By making sure the personalities, styles, and values of the people who will serve your clients are harmonious, you will limit the stress of the transition, and more fully experience the benefits of change.

Olivia Mellan, a speaker, coach, and consultant therapist, is the author with Sherry Christie of The Advisor’s Guide to Money Psychology, available through the IA Bookstore at E-mail Olivia at [email protected].