The Practice Doctor is IN

Al Depman, CLU, ChFC, CMFC, BH

Practice Management Consultant

5 Key Steps in Selling a Financial Services Practice

“The shoemaker’s children are often shoeless.” Or so goes the old proverb. Most financial services professionals have “retirement planning” as a line item in their brochure or web page. Yet how many of you have done your own retirement planning? In addition to the standard triad of government programs, company pensions, and personal savings/investments, how will you, the financial professional, tap into a fourth asset: the value of the practice you’ve been building all these years? More than ever before, an aging population of advisors is seeking an answer to that question. In the past couple of years I’ve been drawn into more of these succession situations than ever and have gleaned a set of five critical criteria that need consideration when embarking on this project. 

Mike, our family’s financial advisor, decided it was time to retire. He’d celebrated his 40th year in the financial services business and while he enjoyed interacting with his top tier clientele, at 65 years of age he was ready to break away from the daily grind. Over time, his practice had grown from a legacy life insurance model, evolving through changes in the financial markets, ultimately settling into three main pools: 120 financial planning clients, 225 single need clients, 75 small group, and 300 individual health clients.

Mike had entertained some discussions with would-be buyers over the past few years but hadn’t found a serious contender––until he met Brad.

Brad, 54, has been expanding his 30 year practice by selectively buying out other advisors. What particularly attracted Mike was the fact that Brad’s son, Bryan, 29, was an integral part of the team, had an ownership interest, and would provide a “next generation” of care for his best clients and their families.

The negotiations and buyout took place over a year and provide us with an excellent case study of best practices in Mike’s ownership transition to Brad and Bryan. There are five broad topics to cover in preparing for a successful succession, each with risk and reward implications:

1. Values match
2. Transition participation
3. Systems compatibility
4. Financial considerations, and
5. Readiness for client transfer.

Let’s look at each.

Values Match

During the discussions to determine if he’s going to purchase a practice, Brad seeks the answer to a deceptively simple question: “Is it about the clients or about the money?” Is the seller––Mike in this case––more interested in getting his price than in the care and servicing of his clientele? The question cuts right to the fundamental philosophy of Mike’s approach to his practice: is he relationship-based or transactional? The answer will drive the rest of the negotiations.

There are many values-based red flags that Brad watches for while engaging a seller. Among them:

• Has the seller been consistent with the annual reviews of his clients?
• Did the seller get to know the next generation of the top clients and begin introducing legacy planning ideas?
• Has the selling advisor done his own financial planning? Is this sale the sole means of support or have other retirement income streams been established?
• Did the seller have his own contingency plan in place for disability or death? This would indicate a strong client-orientation.
• Are there any compliance issues in the seller’s history? Are there any lurking in the future?

Transition Participation

In entertaining the decision to buy the 120 planning clients (the health and single-need clients went to other buyers), Brad next looked to what Mike would be willing to do to insure that most––if not all––would agree to the switch. One of the biggest dangers in a practice sale is when key clients are uncomfortable with the buyer and choose to find another advisor. 

Mike agreed to sit in on each face-to-face client meeting with Brad to:

• personally hand over the case files,
• give his blessing to the deal,
• answer questions,
• review the specific client’s planning strategies that had been set in motion, and
• help with the initial transfer paperwork.

Compatibility of Systems

At the heart of preparing a practice for eventual transition are eight business systems (see practicetools.net).  Each of these eight business systems can be scored by a practice assessment. The cumulative score of the assessment is on a 1,000 point scale, with 600 being the breakpoint for minimum “transferability” of a practice. The higher the score, the better. 

Financial Considerations

Having established a values match, systems compatibility and agreeing on a hands-on transition period, Mike and Brad got serious about the sales price. Here are the biggest determinants in what was to become the final contract:

• Multiple or recurring income stream. At the core was determining a two-year recurring revenue flow from the 120 planning clients. Mike’s assessment score of 791 gave him latitude to ask for a multiple of 2.0 to that base amount (an 800+ score would have allowed a 2.5 multiple). This constitutes the “good will” factor.
• A determination of what new business was identified and set in motion.
• Examining the mix of products and investments to identify potential repositioning
• Other items to be included in the sale, such as furniture, equipment, fixtures or software.
• Mike’s needs in terms of structuring of the payout as income. This is the arena for accountants, but both parties agreed that treating the income as capital gains was the best strategy.
• Mike also agreed to a scale-back provision. This protects Brad in case a pre-determined percentage of the 120 clients decide to defect.

Readiness for Transfer

The final stage of succession consideration is preparing the buyer’s team for an influx of client “re-papering” from one practice to another. This can be a huge undertaking. Think about it from a practical standpoint: would your practice be ready to take on 120 new clients in the next year while continuing to process new business plus communicate with, and service current clients? After having done a number of these take-overs, Brad’s team is well positioned to execute the vast array of paperwork and integrate information, both hard and soft, into their CRM. Temporary help will be required, and additional hires might be needed once the dust settles. 

As a satisfied client of Mike’s and now Brad’s, I can attest to this 5-step approach. And with my practice management consultant’s hat on, it’s a stellar example of a win/win/win practice trifecta for Mike/Brad/and Me––the client.

The Doctor is OUT.

Al Depman, CLU, ChFC, CMFC, BH, a.k.a. “The Practice Doctor”, is MitchAnthony.com’s Business Practice Consultant. He is the creator of “The Practice Management Assessment” tool and materials and has authored numerous articles in professional publications on practice management, and author of the book, How to Build Your Financial Advisory Business and Sell It at a Profit, now available from McGraw Hill. Al combined his Liberal Arts studies with 10 years of management experience with McDonald’s Corporation to enter the financial services world 25 years ago. Since then, Al has evolved from an MDRT-level sales rep into a full-time consultant specializing in helping others engineer their business practices to the next level. Contact him at al@mitchanthony.com.

© 2011 Al Depman