Coach’s Forum: The pros and cons of an offer to sell

I have been in the industry for only six years and have been steadily building my practice the old-fashioned way – through hard work, referrals, etc. I am happy with my progress to date and now have about $75 million in assets under management (AUM). The book of my associate, who is offering to sell, has almost $50 million in AUM, so adding his clients to mine would give me quite a boost.

I am cautious by nature, and this opportunity almost seems too good to be true. I could leapfrog my business ahead by two-thirds – all at once.

That is probably why I am hesitating at all. Am I being dumb for even thinking twice about this?

coach says: as you noted, there are far more buyers for practices today than sellers, so anyone wanting to sell can choose from a number of suitors. You must have demonstrated that you would be a good person to entrust with the other advisor’s clients.

I do agree with you, however, that caution is warranted, although not necessarily because this seems too good to be true. My caveats would be more about whether this is the right deal for you personally. There are quite a few things you should probably consider before you make the commitment.

Let’s walk through several of them:

– the “build” vs the “buy” philosophy

This is one of those ongoing debates in the industry. Is it better to build your business with the types of clients you want and in the manner you favour? Or should you take on someone else’s idea of what a practice should look like and try to integrate that practice into your view?

The first approach, building your book, obviously takes much longer. But, at the end of the day, you will have a business that reflects your personal values and philosophies and includes clients with whom you like to work.

Bringing another advisor’s clients into your practice will be a faster way to scale up (assuming the new clients stay). However, will your business be the business you want when the integration is done?

– The issue of “fit”

This topic is somewhat related to the point above, in that “fit” addresses the matter of compatibility. The key question is: “To what extent do my associate’s clients resemble my preferred client profile?”

If your clientele is made up of, for example, primarily 40- to 55-year-old business owners and self-employed professionals, and the clients you will be acquiring are mostly 60- to 70-year-old retirees, how will you have to adjust to deal with your new clients? Do you have the knowledge and social skills to do so?

There also are matters of process. If you have a strict requirement that all clients have a written financial plan updated annually, but that hasn’t been the practice of your associate, how will you impose your regime on your new clients? And what about service levels? If your associate segmented all his clients and used a tiered service delivery, whereas you believe every client should be treated the same, which option will you follow?

Other issues related to the question of fit include investment philosophy, the types of products you typically recommend and, of course, compensation model.

– Workload

You haven’t indicated how many clients you potentially will be bringing on. However, I am guessing there will be a fair bit of work associated with the transfer. Aside from any administrative requirements, you will want to meet with at least the top-tier clients soon to improve the likelihood of retaining them.

You can expect some long hours in the beginning and later in the process, as you meet with clients to understand their financial affairs better and your role in helping those clients achieve their objectives.

You also will be committing to running a larger practice. As practices grow, they inevitably become more complex and require more management time. Does that fit with the vision you have for your business and your role in it?

– Resources

In my experience, most advisors with books of business in the $75 million-$100 million AUM range run pretty lean practices. It is likely that you have one assistant, perhaps two, depending upon the depth of work you do with your clients.

You probably are close to capacity personally, in terms of time available to meet clients, so the question is: “What additional resources (human, technological, operational, etc.) will you require to increase your capacity to serve the significantly increased number of clients? For example, will you have to hire another staff person and, as a result, will you need more office space?

– Liabilities

Remember that when you buy assets from another advisor, you automatically inherit the liabilities that go with them.

How was the other book managed, from a compliance perspective? Are “know your client” documents up to date? Are client files complete and do portfolios align with clients’ risk profiles and objectives? Are there any large leverage programs in place? Are there previous or current client complaints?

– Price

This question certainly is not the least of your considerations. However, in my view, if there is a significant disconnection on the previously stated issues, the question of price may be irrelevant. That said, you will want to be able to acquire the book being offered to you for a fair price that reflects its long-term value to you.

If you are a frequent reader of this column, you will have seen me write a number of times that the only thing that determines the value of a practice is future income. That means assumptions will have to be made regarding such issues as retention, compensation models, growth and expenses.

I would encourage you to obtain a professional valuation from someone who understands the business and its metrics.

Recall also that the terms of the deal should influence how much you are willing to pay for the business. If the seller wants most of his money up front, you should seek a discount. If he is willing to extend financing, you should expect to pay more for that convenience.

– Legal matters

Finally, make sure that everything is tied up neatly in a professionally drawn-up purchase-and-sale agreement for the assets you are acquiring. Space does not permit me to list all the terms and conditions that should be in an agreement. Most are obvious, such as price, terms of payment, timing, representations and warranties.

In addition, be sure your agreement includes non-competition and non- solicitation clauses – in case your associate decides to leave the family business again at some point down the road and return to the financial services sector.

As you can see, some of the considerations above are more emotional than practical. It is important for the success of this opportunity for you to be prepared both emotionally and practically. If those two conditions align with a fair price, I’d say you have a good deal.

If something is out of sync, however, I’d suggest you take a serious second look and seek professional advice.

George Hartman is managing partner with Elite Advisors Canada Inc. in Toronto. Send questions and comments to ghartman@eliteadvisors.ca.

© 2015 Investment Executive. All rights reserved.