If I had a dollar for every adviser who has expressed an interest in buying another advisers business I’d be retired now. It seems to be the primary strategy for attaining scale and a viable business of one’s own, and there has been even greater interest since regulatory reform began in earnest. Buying another advisers practice is usually a much more complex matter today than 5 years ago though.
Many advisers however don’t approach the idea in a commercial fashion though. They often look at it as just picking up a few assets, or renewal income streams, to add to their existing book of business. So it 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 works well enough if you are just buying a relatively small portfolio of business and swinging it into your existing brand and business structure, however many of those opportunities are disappearing as more financial advice practices become increasingly sophisticated and complex commercial structures.
It is becoming less common for a purchase of the income stream only, and far 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.
To give yourself the best chance of getting the funding and then successfully acquiring and integrating a purchase, you need to do at least the following before you are ready to buy another practice:
1. There must be a bigger plan. The “plan” is not just the agency purchase. There must be a strategic purpose which makes sense commercially.
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 needs to be done. “Pollyanna” thinking just doesn’t cut it anymore.
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 detailed.
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 these days involve some serious money, and some serious risk. For the smart professional growing a great practice acquisition remains a good strategy – provided it is done thoughtfully and makes strategic sense.
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