Buying an Advisory Practice? These Tips Will Help You Get it Right

There are generally two reasons to buy a financial advisory practice, according to Michael Kitces in his Nerd’s Eye View blog, “Is Buying a Financial Planning Practice a Good Way to Start as a Financial Planner?” The first reason is to acquire or merge with another firm in order to increase revenue and scale. This generally applies to a larger practice or institution. The second reason is that a new planner is anxious to get a business up and running, and doesn’t want to build a practice from the ground up. Buying a firm may be more common among career changers with existing financial obligations.

In either case, there is evidence that retaining clients and deriving full benefits during and directly following an acquisition is difficult to accomplish. Jason Carroll, of Live Oak Bank, in an Investment News article describes common pitfalls that occur when acquiring a financial advisory practice. These include important staff quitting, clients heading for the doors, sellers going back on deals, and the actual benefits of the acquisition turning out to not be worth the price. Carroll goes on to report the results of a 2012 Aite Consulting Group survey which states that 33% of advisors who buy an established practice admitted that they retained less than 50% of the seller’s client base.

If you are considering buying a financial advisory practice, the first big step is to perform your due diligence. Don’t rush into anything, check and recheck the books, and watch out for potential pitfalls. In order for an acquisition to succeed the practice must be a near perfect fit for the buyer. Getting to know the seller, employees and the operations processes of the practice you are interested in buying are all extremely important. Be sure to get clear responses to all of your questions and concerns before you get close to finalizing any transactions. (For more, see: Top Tips for Buying a Financial Advisory Practice.)

Every business has their own culture, values, work styles and tactics. People looking to buy a business also have their own expectations for how the company should be managed, so there is potential for conflict even before a transaction begins.

Besides the possibility of disagreements due to differing management philosophies, there are other negatives that come with the idea of a sale. Mergers and acquisitions scare existing clients and staff. The staff fear that they will lose their jobs. The clients, who signed on with one firm, are faced with the thought of having their accounts handled by a company they didn’t choose.

Clear communication and patience are crucial for handling this process. The buyer must meet with the seller and employees to ascertain the corporate ethos within the firm. Next, the acquirer must fully grasp the client protocols and evaluate existing processes. All parties involved must understand what stage the acquisition is in and how everything is proceeding. Transparency will minimize the fears and anxieties of employees and clients. If the culture is not a good fit, don’t be afraid to walk away. (For more, see: Top Management Tips for Your Financial Advisory Practice.)

The seller and buyer must both be in a strong financial state. If the purchase is financed by debt, then there needs to be enough corporate cash flow to service the debt payments. The acquirer should hire an accountant to examine the books and look for sustainable income as well as any red flags. What-if scenarios are key. When acquiring a firm, consider the limit to how many clients can be lost while still keeping the deal solvent. For example, if the deal goes sour with a loss of 25% of the practice’s clients, then the buyer be able to see ways to make up the resulting loss of revenue.

When examining financials, learn and understand how the firm makes money. Do they charge a percentage fee based on assets under management, an hourly rate, or are they compensated on a commission-based model? Look at the income and expense growth trends. Study the sustainability of current income streams. (For more, see: Top Tips for Staffing Your Financial Advisory Practice.)

Examine any and all expenses carefully. Ask yourself if they seem reasonable and whether they are likely to increase. Are the firm’s compensation structures, overhead and operating expenses likely to remain flat or increase? When acquiring a financial advisory firm, it is very important to make sure the investment will be worthwhile by looking under the financial hood just as you would when buying an individual stock or any other type of business.

Once you have decided that you definitely want to buy, make sure the paperwork is reviewed by a lawyer with experience in acquisitions. Write down each parties' expectations. Involve the staff and other advisors in this phase to ensure that they feel comfortable with the new organization. Items to consider are; clearly defined employee duties, revised business practices, and hierarchy of employees. When all involved parties work together, you’re more likely to have a smooth transition.

If the seller is leaving the firm, he or she must give the new owner an appropriate introduction to each existing client. Client retention is a key to maintaining cash flow. Just as the existing staff and advisors must be part of the transition discussion, the clients must feel confident that the quality of service that they receive will continue or improve under new management. Make sure that they feel taken care of and ensure that they are well informed. Ask clients to share any questions or concerns they might have, so that you can circumvent and minimize potential exits.

To make an acquisition go right, you need to take your time. Don’t ignore red flags, no matter how minor. Make sure you double check your findings and assumptions with trusted professional contacts. Finally, do not forget that you can always back out of a deal and look for another business if you are unsure about the acquisition. (For more, see: How to Find Wealthier Financial Advisory Clients.)