5 Things Financial Advisors Should Know Before Buying A Book Of Business

Buying a financial advisor's book of business may or may not be a lucrative endeavor...

NOTE: If you’re a new financial advisor, make sure you check out Your First Year As A Financial Advisor, where I reveal several things every new financial advisor ought to know.

One of my Inner Circle members sent me the following email about buying a book of business: 

Dear James, 

I am a financial advisor who wants to buy a book of business and I’m currently looking at different practices for sale. Do you have any advice for someone like me who’s looking to buy a book? 

I thought this was a great question. However, I couldn’t do it justice in a short and sweet email. So, I wrote this article. Here are a few things all financial advisors should know before they buy a book of business.

1. Take Your Time

The very first thing I would recommend to a financial advisor looking to buy a book of business is to avoid rushing the process. 

Opportunities are like buses - there’s always another one coming around the corner. Don’t get frustrated if one or two opportunities slip through your fingers because you were busy doing your research and due diligence. This is a major decision and you should not take it lightly. 

With that said, finding a practice for sale can be tricky because finding someone ready and willing to sell can be difficult. Many experienced financial advisors are married to the income stream and they enjoy what they do. In other words, they build up a decent book of business and then coast on the income. Getting them to separate from that can sometimes be a challenge. 

However, don’t jump the gun merely because you’ve found someone willing to sell and you’re willing to buy. Make sure you follow my second tip…

2. Do Your Due Diligence

Check EVERYTHING. I can’t stress this enough. 

Ronald Reagan has a quote that I think applies here: “Trust but verify.” 

Ask the seller to explain his or her approach to determining the purchase price. The response will not only help you figure out the reasonableness of the price but also help you identify opportunities for negotiation. 

Ask the seller if he or she used a valuation expert or professional appraisal. If so, make sure you get a copy of the report provided. If the seller is hesitant to provide it, run away as fast as possible because it means the report points out serious weaknesses with the business. 

Do your research. Contact various financial services business brokers and ask them to provide examples of similar businesses for sale so you can compare the purchase prices. 

Get an accountant to review the business’s financials and tax returns. The accountant will be able to see trends, analyze cash flow, and flush out symptoms which may indicate more severe problems in the business. The accountant can also help you understand the potential for the book of business to service any debt you take on to close the deal. 

When you purchase a financial practice, you’re essentially purchasing the income it can generate for you. Make sure the business you’re buying has lots of free cash flow or future expected earnings. 

Also, look at how likely it is that the clients will stay with you. The best way to do this is to make sure the clients are in your specialty and/or find a seller who will help you transition. For example, if you’re a financial advisor who specializes in working with small business owners, buying a book that contains nothing but corporate executives probably doesn’t make sense for you. As far as the transition is concerned, without a gradual and organized transition, retention rates plummet.

In addition to that, make sure you can provide the type and level of service the clients to which the clients have grown accustomed. For example, you don’t want to buy a business with quarterly reviews if you’re only set up for yearly reviews. Make sure you dig deep into HOW the seller runs the business and what he/she does on a daily, weekly, monthly, and yearly basis. Leave no stone unturned. 

Keep in mind that clients are not obligated to transfer their business to the purchasing advisor. They can choose any advisor they want. The minute you purchase the business, they could kick you to the curb. That’s why you need to seriously consider the likelihood of them choosing to transfer and how much time that will take. Your time has a dollar value as well - never forget it. 

Unfortunately, retention rates when buying a book of business tend to be low. A 2012 Aite Consulting Group survey revealed that 33% of financial advisors who bought an established practice admitted they retained less than 50% of the seller’s client base. How embarrassing! 

Finally, don’t overlook the intangibles. Is there a “secret sauce” the business can give you? For example, financial advisors who have implemented my email marketing system have created an asset that not many others have. The ability to seamlessly and effortlessly follow up with qualified prospects via email (which takes very little of your time) is a system that can add tremendous value to any practice for sale. Sniffing out these intangibles can make the difference between a “heck yes!” and an “oh no…”. 

Performing due diligence is arguably the most important thing you can do when evaluating a financial advisor practice for sale.

3. Don't Overpay For It

Depending on the size of the business, you may want to hire a valuation expert or appraiser. A valuation report or appraisal will typically give you reliable information to help evaluate the purchase price. It may also give you tremendous leverage when negotiating. And if you’re getting a loan for all or part of the purchase price, your lender will likely require an appraisal anyway. 

A quick and dirty rule is 1-2X gross revenue. Sadly, many advisor firms are selling for 2-3X revenue, which means it’s a seller’s market and buyers are getting squeezed. 

Not only that, traditional lenders such as Small Business Administration lenders, usually frown upon lending money to purchase a financial practice. Why? Because the value is in the goodwill of its clients and not in the tangible hard assets (like equipment, real estate, heavy machinery, etc.) supporting other types of business loans. 

When evaluating the business, don’t let your emotions get in the way. Look at the data and let the numbers rule. You wouldn’t overpay when investing in the stock market, so don’t overpay when investing in a business. 

If you’re buying a book of business, view it as an investment. You’re allocating capital and putting your money to good use by purchasing a business. 

4. Create A Transition Plan

If you research how to create a transition plan, it’s easy to be intimidated by the process. A transition plan doesn’t have to be intimidating - it’s merely a plan where you put your goals, strategies, and priorities for your transition. 

For example, if this isn’t your first rodeo and you’re acquiring several books of business throughout your career, your transition plan might include how you intend to incorporate the new business into your existing structure. 

Another important part of this planning is making sure the transition will be successful long term. This means getting yourself in a position to take over and effectively run the company.

5. Hire A Corporate Lawyer

You want to hire an attorney so you buy what you think you’re buying and that the agreement protects your interests. Do not skimp on legal advice. Buying a book of business is not the time to be penny-wise and pound-foolish. 

Business acquisitions come in all shapes and sizes, and so do lawyers. Hiring a stellar lawyer is important because he or she can have a great amount of input over the success (or lack of success) when buying a business. Careful selection is critical. Yet, most people spend more time grocery shopping than selecting a good lawyer. 

When you’re hiring a lawyer, conduct interviews. Make your needs clear. What types of work does the attorney handle? Are they familiar with financial advisor practice sales and acquisitions? Would you feel comfortable making demands of them? Keep interviewing until you find the right fit. 

Also, be sure to check references. Ask for references of buyers he or she has represented in buying similar businesses, preferably financial advisor practices. 

One little tip that could save your butt is making sure your business lawyer includes a contingency in the Purchase Agreement that allows you to get out of the deal if you can’t obtain reasonable financing. For example, if the appraisal comes in lower than the purchase price, you will have a right to terminate the deal. 

Above all, weigh your options carefully, and…

Hiring a corporate lawyer can help you avoid costly mistakes when buying a financial advisor book of business.

Consider Building Your Own Book Of Business...

In my humble opinion, building a business will always be better than buying one. 

When you buy a financial advisor’s book of business, you’re taking a gamble on something that may or may not work out. The clients are highly likely to leave you anyway, which means you could be worse off than when you started. 

There has never been a better time to be a financial advisor and it has never been easier to build a book of business. You can literally pick a target market and reach out to that market using LinkedIn. You can develop relationships with CPAs and get a flood of referrals. 

While I certainly advocate offline business-building methods, the Internet has made everything so much easier for financial advisors looking to build their practices. Here’s another example - you can build a website around your target market, build an email list of people in that market, and follow up to get them to set an appointment. 

In my mind, there’s almost no situation where it makes sense for a financial advisor to buy a book of business. None whatsoever… and I’ve seen a LOT of acquisitions. In almost every case, the financial advisor would’ve been better off building his or her own business. That’s because instead of using precious capital to buy someone’s book (and make someone else richer), you can use your capital to build your own book of business.

After all, the truth is that most financial advisors who buy a book of business are merely buying a job. Once the sale goes through, the advisor will still have to work hard at marketing and prospecting to grow the business anyway. So, why not start with that? 

ALSO READ: 27 Financial Advisor Marketing Tips, Techniques, and Strategies That Work

Let's run through a simple example of how the math may work. Am I saying you'll get the same results with the same numbers? Absolutely not. But humor me and let me show you how allocating capital to build your book of business may be a better solution... 

We'll assume you pay 50 cents per click driving traffic to a landing page on your website, where you offer a niche-specific lead magnet (such as "7 Retirement Mistakes Dentists Make And How To Avoid Them").

Assuming 20% of those people opt-in to your email list - a fairly conservative number - this means you will have spent $2.50 to get an email subscriber. 

Now, let's say you have an email follow-up system similar to what I describe in Appointments On Autopilot and your email marketing machine eventually converts 5% of your email list - again, a conservative number - into booked appointments. This means you will have spent $50 to book an appointment with a prospect. 

And let's say you only convert one out of every four booked appointments into paid clients. If you've been following along, you know that means you will have "bought a client" for $200. 

My question to you is this: why in the world would you ever buy a book of business when you can do stuff like this and build it yourself? Why take on all that debt and risk... not to mention the time involved in doing the due diligence? Heck, in the time it takes to successfully transition a business, you could build one yourself with less stress, less hassle, and be left with more money in your pocket. 

If you're going to go out there and buy a financial advisor's practice for sale, I wish you nothing but the best. However, I strongly encourage you to weigh your options and see if there's a way you can improve your own marketing and prospecting first.

Because sometimes financial advisors think buying a book of business will somehow fix their marketing and prospecting flaws. It won't.

For example, one of the dumbest things I catch "experts" and "gurus" tell aspiring financial advisors is that the solution to their problem is to "make more calls".

This is so dumb. 

Because if you're not effective at getting clients, increasing the quantity of your ineffective methods only speeds up the pace of failure. If you take a sip of spoiled milk and feel sick, slurping down the whole carton isn't the cure. When you buy a book of business without a proven marketing system already in place (yours, not the seller's), it's like you're backing up a truck filled with spoiled milk and inserting the hose directly in your mouth. 

If this article helps just one advisor, I've done my job.

​Choose wisely. 😎​
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