How to Buy the Right Practice — Not a Lemon

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.