Seven years ago, I considered buying a practice. I offered a gentleman what I thought was a good deal: the payments would be made by the broker-dealer; all he had to do was keep his license going for four or five years (assuming the BD required that he be licensed). He would have received payments as follows, based on his book of business and assuming a 90 percent concession payout to me:
Year 1: 70 percent to him; 20 percent to me
Year 2: 70 percent to him; 20 percent to me
Year 3: 50 percent to him; 40 percent to me
Year 4: 40 percent to him; 50 percent to me
Year 5: 20 percent to him; 70 percent to me
That was 250 percent over five years and would have given him income on increases, too, assuming the assets grew and/or his customers added money to accounts. So, it might have, overall, gotten close to maybe 300 percent in total. Had he said he needed more, I would have probably upped the ante some as to percentages, but he didn’t say he needed more.
He turned the deal down. Why? No front money. When he said there had to be front money, I thought his must be a bad book of business. Why did he need front money? I have a deal regarding my practice — if I get hit by a falling meteor, my purchaser will pay my family income over a number of years. Initially, the purchaser assumed I needed front money, but why? I took a deal with no front money. I believe I have a good practice, that the purchaser will take care of my customers, and that few, if any, will leave the practice.
It occurs to me that a key to successful buyouts is to have a broker-dealer make the split payments to each party. That helps both purchaser and seller by saving each from accounting nightmares. If there are two broker-dealers involved, then there should probably be a trust, run by a trustworthy (there’s a pun there somewhere) individual or group. Maybe I’ll start one — buyouts are often messy, and there’s no real need for mess.
Have a great week, and think about having your customers (and your family) taken care of after you are gone. Better to have you arrange things than to leave things to chance, yes? I’m not sure in this case what “chance” means, but it can’t be good.
For more from Richard Hoe, see: