This comment by Warren Buffet does not always hold true when buying or selling a financial advisory practice or client book. Often, unforeseen issues arise after the transaction has been concluded, mitigating value.
Unpleasant surprises can be minimised by preparing carefully and considering the various elements in the buy or sell process. At Celestis, we refer to these elements as the Practice Transfer Value Chain.
In In reviewing the elements in the chain, there are specific issues that we believe warrant special attention.
Preparing your practice for sale
The obvious first step in the process is to build your practice’s “saleability factor”. Demonstrating that you have fulfilled your legislative obligations is important, but several other factors play an important role in upping the value.
Examples include:
•v audited, well-presented financial statements;
• up-to-date and comprehensive data about the practice’s long-standing, satisfied and profitable clients; and
• the ability to demonstrate that the practice has implemented efficient processes, client communication and service standards that can easily be replicated.
These and other value drivers form the basis of any reputable practice management programme.
Finding the right buyer or seller
Ideally, as a potential buyer or seller, you would want to be aware of what is available on the market. You need to make an informed decision based on solid facts, without being pressurised.
In our experience, this is very difficult as buyers and sellers often wish to keep their intentions to themselves and only share their plans within their close networks. By making your intentions public in a safe and secure environment, you may reach a much wider audience, providing you with more options.
Business valuations
There are many ways to value a financial advisory practice or client book. While the industry uses a rule of thumb approach (often two times accrual income), arriving at a realistic value for a business requires a thorough process.
A business valuation must consider qualitative and quantitative aspects of a practice. The precise model used to calculate the value of your business will depend on whether you are considering the sale of the business as an entity or the client book or part thereof. And the model used needs to consider a variety of factors that include, in particular, risk factors and the sustainability of the business post sale. A simple multiple of income ignores critical factors.
When getting a business valuation done, use an independent service provider who understands our industry. And remember that you pay for what you get. On completion of the valuation, you should be provided with a document that specifies the value with justification for the use of the model and variables applied. It should provide you with a sound basis for negotiation.
Due diligence audit
Once both parties are ready to proceed, it is necessary for the seller to open the practice to the buyer in order for the latter to validate facts. Typically, this would involve a due diligence audit by an external party.
Make sure that the necessary confidentiality agreements are signed and in place before proceeding with this step. Because of the significance of a due diligence audit, we strongly recommend that you consider the services of experts, such as an accountant, compliance officer or suitably qualified person. Also remember that you need someone who understands the business and who will ask all the relevant questions with your interests in mind.
Negotiation assistance
Ultimately, the transfer of ownership of a financial advisory practice or client book will be determined by the willingness of both the buyer and seller to transact. The price and several other factors will influence this willingness. The manner in which the practice is presented by the seller and a clear understanding of what is on offer on the part of the buyer will facilitate negotiations. The business valuation report should play a very important part in this process. Depending on how confident you are with your negotiation skills, it may be prudent to get someone to assist you during the negotiation process.
Drafting of legal agreements
An absolutely crucial step in the process, best left to professionals, is the drafting of legal and sale agreements. Whilst there are many examples available, it is always recommended that you make sure that yours is customised for your particular situation.
Post sale implementation
The true test of a successful sale of a practice or client book is what happens after the transaction takes place. If the post-sale integration process is not thought through and properly planned for, much of the value can be destroyed overnight by clients leaving the new owners. In most instances, payment for the practice or client book will be structured so as to encourage the buyer to retain this value and a failed integration will mean that both parties lose in the long term.
A detailed implementation plan outlining the various required actions should be part of the agreement. Specific issues include, for example, how long the seller will stay on for after the sale, exactly what duties the seller will have, the time period over which the seller will have to personally introduce clients to the new owners and whether or not the seller will be required to sit in on client meetings.
Meeting of minds
The significance of buying or selling a practice or client book is obvious. For the seller it could mean retirement or exiting the business, secure in the knowledge that long-standing clients are in good hands. For the buyer, it could be a momentous expansionary step. For both, the transaction must represent value for money. Achieving these goals requires a meeting of minds, co-operation, negotiation and, often, an element of compromise. Most importantly, the successful conclusion of the deal will hold benefits for the client in terms of continuity and ongoing service.
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