When buyers come knocking, take it slow

Advisor: I am a regular reader of your column and I have particularly enjoyed your frequent comments on preparing a practice for sale, as my plan has been to retire when I reach age 65, which will be in six years.

At least, that was the plan until recently, when I received not one, but two unsolicited offers to purchase my practice. I have never indicated to anyone that I intended to sell or that I even had the slightest interest in doing so. But, suddenly, there are people asking me if I’d be open to such a discussion.

My initial reaction was to say no. But I have been thinking that I at least ought to have a look. I have had a similar experience with a house I owned. I had no intention of selling until one day a realtor knocked on my door and said she had a client interested in a house on my street. It was, no doubt, a ploy to get a listing; but, in the end, it didn’t matter. I sold the house for substantially more than I thought it was worth and accelerated the plan my wife and I already had to downsize to something more appropriate for us as empty nesters. Could this be another such opportunity?

Coach says: You obviously have done a good job of building your business and its reputation if it has caught the eye of other advisors who are interested in buying it. Perhaps you recall the column in which I said that even if you have no intentions of selling in the short term, you should always be working to have your practice ready to be sold at any time – to the most qualified buyer and for the highest price. You never know when a contingency or an opportunity might make selling desirable.

However, although I don’t want to diminish the glow you obviously feel as a result of all this attention, let’s keep things in perspective and acknowledge that we are in a seller’s market when it comes to financial advisory practices. Based on my experience in working with advisors across the country, I would estimate there are at least 10 potential buyers for every seller out there today. That doesn’t mean that every practice for sale is a good one to buy or that every potential purchaser is a good candidate to take over an existing business. It just means that you, as a potential vendor, have the leverage at this point in time.

Being in this position also gives you the power to control, somewhat, the pace and the nature of the negotiations. On the other hand, you cannot be so demanding or unreasonable that you chase away a good candidate.

With that in mind, here are a few tips I would offer at this early stage in the process. Please bear in mind that if you decide to proceed beyond preliminary discussions, a much more comprehensive and disciplined approach is recommended.

– SLOW DOWN

Because the demand is high for good practices for sale, potential buyers are inclined to create a sense of urgency in order to try to shorten the negotiation process so they can scoop up the business before anyone else gets in on the bidding.

Presumably, you have spent a good number of years building your business. It only makes sense to take a reasonable amount of time in deciding how you are going to hand off your life’s work. We will still be in a seller’s market a year from now, so you don’t need to rush your decision for fear of missing the bull market in advisory practices.

– VISUALIZE YOUR LIFE AFTER THE DEAL IS DONE

I often distinguish “succession planning” from “exit strategy” by describing the former term as what happens to the business after the founder is gone; the latter term refers to what happens to the founder after the business is gone.

It is fairly easy to imagine what you will be doing to fill your days right after a sale – some golf, travel, time with family, etc. It is more difficult to visualize the rest of your life – particularly because, in this instance, you would be advancing your planned retirement date by five or six years.

Can the things you had planned for your initial retirement date be moved up? Or will you have – or want – to do other things? If you are not excited by the prospect of starting the next stage of your life earlier than planned, perhaps it’s a sign that you are not quite ready to sell.

– DON’T SIGN ANYTHING UNTIL YOU ABSOLUTELY HAVE TO

Most potential buyers will want a letter of intent (LOI) early on in the process, stating that they will conduct their detailed due diligence over a 60- or 90-day period. What this really does, however, is give them exclusive rights to poke at your practice for two to three months while keeping competitive bidders at bay.

Your leverage and your ability to influence the sale price and terms is highest early in the process and diminishes over time as you approach the closing date. Once you sign an LOI, you lose much of your negotiating advantage.

– DON’T TELL ANYONE YOU DON’T HAVE TO

As these offers were unsolicited, many of the stakeholders in your business will be surprised to learn that you are even considering a sale. Your spouse, partners or senior staff who will be involved in the buyer’s due diligence need to know, of course. Junior staff and clients do not.

Until you are actually committed to a sale, the uncertainty will lead to speculation, fear for job security, declining productivity and client hesitation to proceed with your recommendations for their financial affairs.

– GET PROFESSIONAL ADVICE

In most cases, unsolicited offers do not reflect the best price you could obtain for your practice if you actively market it.

Aside from the obvious need for legal counsel to document the deal properly, you also will benefit from having a professional valuation completed. Depending on the complexity of your business, expect to pay $5,000-$10,000 to have this done; however, if it results in you receiving $100,000-$500,000 more for the sale, I’d say that would be a good investment.

Similarly, an outside practice-management consultant can likely show you a number of things you can do to increase the value of your practice substantially before you sell it. Some of those things might take a year or so to implement; however, if they increase the market value of your practice by 30%-50% or more, I’d say that also would be a good investment.

– LET COMPETING BUYERS KNOW THEY ARE IN COMPETITION

Nothing raises prices like multiple offers and competitive bidding. (Just think: real estate in most major Canadian cities.) As stated previously, your negotiating power starts to decline as you move further through the due-diligence and sale process.

One way to offset that loss is to have two or more motivated buyers, each of whom knows he or she is competing with others for the opportunity to acquire your practice. This will, obviously, affect the price; but, in addition, it can lead to more attractive payment terms, improved staff compensation/retention guarantees and other arrangements favouring you as the seller.

– ASK YOURSELF IF THIS IS WHAT YOU WANT FOR YOUR CLIENTS

Earlier on, I commented that not every potential purchaser is a good candidate to take over an existing business. Phrased differently, the question becomes: “Would you sell your practice to just anyone?”

Hopefully, the answer is: “No.” You would want to know at least as much about the possible buyer as they should want to know about you.

Although price is the component of the deal on which most advisors focus, it should not be the only consideration. If it was, advisors would simply sell their practices to the highest bidder and hope it all works out. But the truth is that even in today’s hot market, that isn’t happening. Selling advisors are taking the time to try to get the best combination of timing, value and what is right for their clients – on whom the business relies.

My final piece of advice is this: although it is great for the ego and somewhat intoxicating to have someone tell you they like your business so much they want to buy it, this is only the first step. There are many considerations to be dealt with and much work to be done before making a decision. Take time to think carefully about how you want the legacy of your life’s work to be seen.

George Hartman is president of Market Logics Inc. and managing director, advisory services, at Accretive Advisor. Send questions, comments and opinions on any aspect of practice management to george@marketlogics.ca.

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