Is Buying an Advisor’s Business Too Good to Be True?

Considerations of Buying a Book of Business

As an increasing number of financial advisors are getting ready to retire, it may be tempting to purchase a new book of business. After all, it’s a shortcut to rapid growth and success for your practice, right? Not so fast. There are several important considerations to keep in mind as you evaluate your options.

Understand exactly what you’re buying.

If you’re employed by a firm, and you’re considering buying a book from another broker or financial advisor who is employed at the same firm, you may want to negotiate a three- to five-year buyout. This agreement will be between you, the selling advisor and your firm. You will likely need to work with the local office, the manager and the advisor to establish a price and the specific terms of the sale. Make sure to get everything in writing, and read through all documents carefully before signing to be sure you know what you’re getting into.

If you’re an independent advisor hoping to purchase another advisor’s book of business, the first step is to determine what’s actually for sale. Are you really “buying” a book or just “renting” it? I’ve encountered situations where the selling advisor has an agreement with a dealer, and the dealer technically owns the business. In this case, the dealer arranges for the clients to be transferred to the purchasing advisor but the dealer, not the purchasing advisor, continues to own the book. The purchasing advisor pays the dealer based on an estimated cash flow.

In essence, this is similar to renting the book of business, rather than owning it outright because if you, as the purchasing advisor, decide to leave the dealer, you leave the book behind. In this type of arrangement, the dealer will probably also require a non-solicitation agreement, which would prohibit you from solicitating the book’s clients.

This is probably not an ideal situation for acquiring new clients, so be sure you know what you’re getting into before you enter into an agreement.

Have a transition plan in place.

Before you make the leap into purchasing a book, it’s wise to have a client transition plan in place. You’ll want to agree upon a transfer timeline with the seller to help ensure you’re on the same page regarding the transition. The first six to nine months are critical in executing a seamless transition and ensuring client retention, so focus on reaching out to all new clients in order to begin the relationship-building process.

You may want to invite key clients to meet with you and the selling advisor prior to the transition. The selling advisor can introduce you, explain why you’re the best choice as a successor, and help you address any client concerns.

Understand that the new book probably won’t pay off right away.

It may be a while before the new business pays off. And, purchasing a new book isn’t going to save your practice if it’s struggling. In fact, this type of transaction is more likely to put a strain on your current business because you will need to spend significant time and effort transitioning your new clients and building new relationships. This takes time away from your existing clients. Plus, depending on how you funded the purchase, you may be spending the first few years paying for your new book before you realize any profits.

Don’t purchase a book in an effort to pursue a new niche market.

Taking time to ensure the new book of business is compatible with your approach can help ease the transition and get you to a point of profitability sooner. Don’t purchase a book in an effort to pursue a new niche market, as this will only take focus away from your current clients and put a strain on your practice as you struggle to learn about a new client demographic.

Clients are smart. If you’re not well versed in their needs and specific challenges, your new clients will likely figure this out pretty quickly following the transition and may decide to move to a new advisor better suited to help them. Your new clients should complement your existing client base, not take your practice in a completely different direction.

Consult with a professional and your firm.

There are all kinds of potential challenges and pitfalls that come with purchasing a new book of business, but a professional can help ensure a successful purchase that is in line with your overall goals, current client base and vision for the future. An experienced consultant can help:

  • Conduct due diligence and identify a good fit for you.
  • Determine an appropriate purchase amount and help ensure you’re not paying more than what the business is worth.
  • Review the contract to help ensure it’s in your best interest.
  • Create a transition plan.
  • Review the book of business to help determine its quality and whether it is compatible with your current book.

If you are an employee of a firm, it’s important to communicate your goals and with your firm and identify a solution that makes sense for you, the selling advisor and your employer.

At Michael King Associates, we have decades of experience helping advisors navigate the various challenges of purchasing a new book of business. Before you sign on the dotted line, contact us for guidance. We can help you evaluate all your options and maximize your deal.

For more information about how we can help you evaluate your options for purchasing a new book, please contact me directly at michael@michaelking.com, call the office at 212-687-5490 or call or text me on my cell at 917-747-4805. Remember, whatever we discuss is TOTALLY CONFIDENTIAL. Our firm has been around for a long time because we keep our word. At Michael King Associates, we specialize in helping advisors find their ideal place and achieve their best career path. We are your go-to “MATCHMAKERS!”

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