It's Not All Gold

Is there a buying frenzy going on? These days, it seems as if everyone wants to buy a practice to grow her business. Sometimes an acquisition can be an excellent growth strategy. And, let’s face it, the timing is good. Thirty percent of the general population is age 55 or older; 22% is 35 to 49 years old, according the U.S. Census Bureau. Assuming these percentages translate to financial planning and investment management professionals, we can reasonably expect that many boomer-owned practices will come on the market during the next 10 years.

Buying a practice, however, doesn’t always purchase you a gold mine. Let’s consider two possible cases. In both instances, a seven-figure advisor bought a practice half as large from an advisor who was 20 years older. Each purchased practice was located near the buyer; each was predominantly fee-based and had a similar number of clients. The buyers and sellers were dedicated, hardworking, and ethical; managed portfolios personally; appeared to have solid client relationships; and were affiliated with the same broker/dealer.

In the first case, the transition was completed over two months. Clients were informed via letter, with a follow-up phone call made to schedule an appointment with both the buyer and the seller of the practice. All paperwork was completed efficiently and, several years later, 98% of the transferred clients are still with the buyer. The seller continues to have a role with the firm, working part-time with a small number of clients.

In case two, the seller joined the buyer’s firm with the expectation of tapping into a marketing machine and transitioning clients to the buyer. But a combination of factors surprised both the buyer and seller. First, the seller found himself uncomfortable with the day-to-day reality of not running his own business and just couldn’t make the transition. Second, the seller was forced to deal with some unexpected health issues, which interfered with the schedule for transitioning clients. Finally, a higher percentage of the seller’s clients had only moderate loyalty and did not follow him as anticipated. Ultimately, the seller retired with only about 10% of client assets transitioned to the buyer.

Slow Down–Avoid Buyer’s Remorse

Because buyers are eager to purchase a practice and perceive it as a quick and easy way to grow the business, they sometimes go into the due diligence phase of the process wearing rose-colored glasses, injecting into it exactly what they want to see.

Let’s say a wonderful opportunity falls in your lap. The planner down the street is selling his practice, and he calls you first. You’ve known him for a long time and are confident about his ethics and compliance practices. All of your buddies are saying how they want to buy an established financial practice, and they spend time researching and looking at practices that come on the market. Because it’s a sellers’ market, you are honored to be approached, so your knee-jerk reaction is to strike a deal as soon as possible. You skim over the due diligence aspect of the transaction, and, move quickly to apply industry averages to the deal, arriving at a purchase price and terms agreeable to both you and the seller.

Suddenly, the seller’s book is yours, and you realize that your acquisition may not be so lucrative after all. As you begin to set up appointments, you discover that a quarter of the book is made up of clients in their eighties, with estate plans long established and children who live far away and are awaiting an inheritance, and who have their own trusted advisors to manage the assets. A second quarter of the book is clients with minimal assets whom you would never have considered taking on in the past. Still another quarter is widowed women, who usually don’t make a move until they check with you first–a style of dependence with which you are unaccustomed and uncomfortable. The final quarter of the clients had only a good-to-moderate relationship with the seller. Their introduction to a new advisor is just the opportunity they have been waiting for to shop around.