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You’ve bested the competition, a seller’s accepted your bid to buy their advisory practice, but do you really know what you’re getting? Is there a way to ensure that you’re not overpaying or that there won’t be any big and unpleasant surprises after the sale?

Understand the Seller’s Psychology

As always, it pays to understand the seller’s psychology. While it’s rare for a seller to intentionally conceal critical blemishes in their practice, it’s important to recognize that they usually don’t see them.

This is because they really care about their practice and often can’t see any of its flaws or imperfections, according to David Grau, Jr., founder and CEO of the Succession Resource Group.

“They love their business, it’s their baby, and no one wants to think they have an ugly baby,” Grau explained. Also, keep in mind that you as the buyer are responsible for conducting the due diligence to ferret out any and all issues.

Check Out Diamonds in the Rough

Buyers also should recognize that many sellers may have begun slowing down years before they decide to sell and haven’t been growing their practices. “They have been coasting on fee-based revenues generated by a cadre of loyal clients and simply don’t need to work as hard or as much,” Grau explained.

“[When] ready to retire, their business development has simply become playing golf with their best clients.

Still, many seemingly stagnant practices have tremendous potential for growth, and number crunching alone may not uncover these opportunities.

Buyers are looking for the “embedded opportunity” in a prospective advisory firm, which is tough to define until the buyer has started meeting with clients.

A firm with regular client appreciation events and a loyal, enthusiastic client base can be advantageous. For instance, well-heeled prospects that clients have brought to past events but the firm didn’t follow up with make for good contacts.

In other words, there’s great potential business here that hasn’t yet been fully tapped by the seller.

Have a Serious Due Diligence Process

Once a buyer and seller have agreed upon a sale price, the buyer typically has a few weeks to take a deep dive into the nitty-gritty of the seller’s practice.

A prudent buyer usually will need to engage outside experts to help him scrutinize the practice. The process is akin to hiring a home inspector to review a potential real estate purchase, says Grau.

During this period, a prospective buyer may hire an accountant or investment banker to help ensure that no stone is left unturned.

Even transactions between friends require serious due diligence, Grau adds, emphasizing that buyers shouldn’t take anything at face value. These are small businesses, and running a small business can be messy at times.

Others agree. “There’s no substitute for time,” said Michael Wunderli, managing director of the investment banking firm Echelon Partners.

A hands-on process of wide-ranging conversations with advisors and staff at a prospective firm is a must. “This is the biggest insurance against getting a lemon,” explained Wunderli.

Dig Into Three Areas

Also, there are three key areas that purchasers need to meticulously vet: firm finances, the structure of the firm, and the nature of advisor and client relationships, said Wunderli.

Look at the quality of a firm’s earnings and assess the profitability of its core wealth management business. Are earnings being generated by a large non-repeatable transaction, like the sale of private placements or old computer equipment? Or are they tied to ongoing fee-based revenue?

Acquirers need to be cognizant of the structure of the seller’s firm,too. Who owns the client relationships? “Figuring out if the clients will stay is 90% of it,” according to Wunderli.

A larger firm with client relationships that it developed and regularly contacts via a team of product specialists has more of a lock on its clients than a firm with multiple advisors who source their own clients and devise their own investment programs.

Both types of advisors should be given backend retention bonuses and should optimally be excited about staying on after the sale, because of the new firm’s expanded platform capabilities.

It’s important to have a thorough picture of the firm’s clients. What is the age profile? Does the firm have multi- generational relationships? What does the client concentration look like from a revenue standpoint? What’s the typical wallet share per client?

Plus, potential problems in the way the deal is structured deserve scrutiny. For example, if two or three clients control 50% or more of the firm’s assets under management, can the buyer speak with them before the deal is done to see if they plan to stay?

Sizing up a potential practice for an acquisition demands a serious commitment of both the purchaser’s time and their financial resources. Make sure you’re fully prepared to do what’s necessary to enhance your chances of success.

Mark Elzweig is head of Mark Elzweig Company, a New York-based executive recruiting firm.