5 Things You Need To Do Before Buying A Practice
Financial Advice & Financial Planning & Practice Management & Strategic Issues

5 Things You Need To Do Before Buying A Practice

July 5, 2019

by Tony Vidler  CFP logo   CLU logo  ChFC logo

imgres copy 3Buying a practice or buying another advisers book of business is, or will be, a really hot topic given the dramatic regulatory changes happening and the proportion of existing financial advisers who just don’t want to go through a few more years of change.

 

For manyt advisers buying another practice or book of clients will be a serious growth strategy that must be considered.  It is a primary strategy for attaining scale and a viable (and relatively predictable) revenue stream, but buying another advisers practice is usually a much more complex matter today than it was (say)5 years ago though.  It is no longer a matter of trust in the reliability of the contracted renewal or trail income, and it can certainly no longer be a matter of trusting the value of those as reported by either a product supplier’ systems or what the selling adviser says it is.  This is not because either party are inherently untrustworthy; but an acknowledgement that both typically have inaccurate records and reporting systems.

 

So any purchase must be considered in a commercial fashion.  That involves a lot more than the traditional method where a purchasing adviser is typically looking at just picking up a few assets, or renewal income streams, to add to their existing book of business.  In those instances the entire deal is approached as a straightforward purchase of a contractual income stream only, and more often than not the entire deal is done on a rule of thumb (renewals multiple) valuation, supported by a handshake. That can work well enough if you are just buying a relatively small portfolio of business and swinging it into your existing brand and business structure, as the deal is relatively insignificant in in the great scheme of things.  Those opportunities are disappearing as more financial advice practices become increasingly sophisticated and complex commercial structures, and will become even more scarce over time.

 

The purchase of an agency income stream only is already becoming less common than it was/ . It is more common for an agency purchase to be a complete business sale which includes all the systems, people, intellectual property, assets…and potential residual liabilities.  Lenders – whether it is bankers or industry institutions – are far more discerning than ever before in providing the necessary funding given some of the dramatic regulatory shifts in the last year or two. This reinforces the need for potential purchasers to be even more commercial in their approach to a potential deal nowadays.

 

To give yourself the best chance of getting the funding and then successfully acquiring and integrating a purchase, you need to nail down at least the following before you are ready to buy another practice:

 

1.  You must have a bigger plan. The “plan” is not just the agency purchase. There must be a strategic purpose which makes sense commercially for the acquisition.

2.  Due Diligence.  You must have realistically assessed the book, and the business, to determine what the real quality is, together with the financial performance of the business and any governance, management or contractual issues that might be lingering.  Most importantly, you have to assess the quality of previously provided advice and understand what your exposure as the new owner may be.

3.  A realistic skills assessment.  Every adviser is a great business manager, right?  Right?  A realistic assessment of what skills and knowledge will be required to make this work, and what the plan is to address any skills or knowledge shortcomings that YOU or your business have needs to be done.  Then there has to be a clear strategy for how any shortfall is going to be rectified if the deal is to work.

4. How are you going to integrate?  Getting all the client data together so you have efficient communications; having a communication plan; ensuring all suppliers/institutions are onboard; working out what will happen with staffing, branding, systems….there is a lot to think through if a takeover is going to be successful. This is where The Plan does need to get quite tactical.  The devil may well be in these details….even if the numbers stack up and make it look like a sensible decision, the numbers and anticipated commercial benefit can be completely undone if the integration issues cannot be resolved profitably.

5. The structure of the deal.  Rarely is it actually as simple as “I will hand over $x on a particular day” anymore.  Allowing for successful integration and retention of clients and expecting both sides to accept some of the responsibility and risk in making that happen should be factored in.  So too should specific responsibilities for prior advice and potential liabilities.

In addition, financiers will be interested in:

  • whether professional (external) valuations have been sought
  • financial modelling which is realistic having been done
  • the degree of vendor flexibility and involvement in the transfer

 

Most purchases moving forward will involve some serious money, and some serious risk or potential for ongoing liability.  For the smart professional growing a great practice acquisition remains a good strategy – provided it is done thoughtfully and makes strategic sense.

 

You may also find this post useful:
R.I.P. To The Accepted Wisdom On How To Grow A Practice
 
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