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6 Essentials to Pick the Right Buyer for Your Practice

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Choosing a buyer for your advisory practice should be a piece of cake. The number of buyers vastly outnumbers that of sellers, so you should simply sell to the highest bidder, right?

In most cases, that would be a costly and irreversible blunder, because much of the value of the deal comes in back-end payments. Thus, advisors need to do the due diligence to be sure that a potential buyer can live up to his or her promises. Once an advisor sells a firm or practice, there are no “do-overs.” You have to get it right the first time, because your retirement nest egg is riding on it.

Selling an independent advisory practices typically includes earn-outs, which are based on back-end performance ranging from 50% to 70% of the total deal or sale’s price. At the wirehouse firms, the entire deal is back-end based. Earn-outs are paid via a mix of cash, equity and interest-bearing notes. Down payments are often 30% to 50% of an agreed upon value.

“It has to be a win for all of the parties–the seller, the buyer and the clients themselves. Their interests must be aligned,” says Mark Penske, chairman of United Advisors.

How does a prudent seller select a buyer who is most likely to deliver both the back-end performance and positive client experience required? In a series of three blogs, we’ll get the answers to those questions.

Matt Brinker, senior vice president of partner development and acquisitions for United Capital, explains: “As a part of United Capital doing 40-plus transactions, I’ve learned that the three most important things in choosing the right seller/buyer are culture, culture and culture.

“All of the strategizing, white boarding and legal agreements can quickly become moot when something doesn’t go as planned or life happens and the quality of people behind the transaction can become incredibly important,” Brinker emphasizes.

Here are six important factors that experienced deal-makers recommend sellers consider when sizing up prospective buyers:

Factor 1: A buyer who can improve your practice

Sometimes a buyer can help develop the acquired practice by offering additional products and services. The buyer may have superior client service or infrastructure capabilities that can facilitate a firm’s growth.

If so, this enables the seller to deliver more value to clients and to attain a bigger back-end bonus. After the sale, the client experience must be at least as good, if not better.

Factor 2: Compatible investment programs

What investment philosophy and structure is the advisor sharing with his clients?

If an advisor works with client through a broker-as-portfolio- manager format using mostly ETFs, he or she is probably not a good fit for a practice that extensively utilizes separately managed accounts (or SMAs) and alternative investments. ETF aficionados often take a dim view of active managers.

Optimally, the buyer’s clients should be utilizing similar products and should be accustomed to a similar, if not an identical fee structure with that of the seller.

Plus, any proposed changes in product offerings or client fees should be discussed upfront prior to the transaction. For example, if the seller’s clients have been taught to view financial planning as a free perk and the buyer wants to charge for this service, this needs to be addressed.

Factor 3: Compatible client profiles

It’s helpful if the buyer is servicing clients of the same demographic groups and with similar investment needs as that of the seller. If retirement planning for individuals or corporate 401(k) plans is a big part of a seller’s business, then the buyer must be knowledgeable in these areas as well.

Factor 4: Compatible client-service expectations

Where are clients located, and how frequently do they expect to be contacted by their advisor?

I know an advisor who purchased a firm with clients located two hours away. His new clients were accustomed to a regular schedule of face-to-face meetings that he just couldn’t provide. Most of these clients eventually drifted away.

It’s not likely that the seller made his earn-out, and neither the buyer nor the clients realized much value from this transaction either.  

Another point that’s not so obvious: Some clients are fine chatting with their advisors two or three times per year. They may not necessarily want more frequent contact.

The buyer’s client-service process must respect such preferences.

Factor 5: The right infrastructure

Does the buyer’s firm have the resources to successfully handle a client base that is set to expand rapidly?

Likewise, the number and caliber of client-service staff must be scrutinized, as well. Are they up to the job?

What about the buyer’s firm back office and IT capabilities?

Factor 6: The trust factor/personality fit

Buyers and sellers will spend a lot of time together after the sale, working to ensure that clients are excited about the new firm. The caliber of the people involved and the personality fit of the buyer and seller are critical to the success of the deal.

Of course, not every step of the transition will go smoothly. So, you want to be sure that you and the buyer will be able to work out knotty problems under possibly tense conditions.

Selecting the right buyer for your financial advisory practice isn’t just about grabbing the biggest upfront offer. The handoff of your firm must benefit all parties: seller, buyer and clients.

Sellers who want to capture the maximum value for their firm need to do some careful and serious due diligence to choose a buyer that will help make that happen.

(The second blog in this series will focus on what advisors need to know about the terms of deals used to sell advisory practices.)


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