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Succession Resource Group is a boutique succession consulting firm based in the Pacific Northwest, serving clients across the country. SRG was founded by David Grau Jr., MBA in 2012 after nearly a decade of helping advisors with valuation and succession planning. SRG's team of experts leverage their industry expertise, combined with best-in-class resources, to help advisors, agents, and accountants manage the equity in their businesses...

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5 min read

How to Acquire a Financial Practice

Jun 9, 2022 12:11:15 PM

Those employed as financial advisors will likely come to a time in their career where they would like to make a vertical move. Once this stage is reached, there are few clear paths available. Some may decide to dig their heels in and open their own financial advisory firm, scrounging up clients where they can and providing the best possible service to ensure the success of their practice.

There is a great deal of risk involved in starting any financial planning practice from scratch, a financial advisory practice is no different. Another way for financial advisors to make the move from employee to the business owner would be to purchase an existing practice. While this decision can have risks and pitfalls of its own, it comes with the added benefits of existing clients, trained employees, and a proven history of service.

man doing his tax returns

With more than half of all active financial advisors over the age of 50, now is a better time than ever for buying a financial advisory, while current owners are planning their own exits and retirements.

If you are currently looking to acquire a financial advisory practice, the process is fairly straightforward and can reap a great many benefits. With that in mind, it is incredibly important for you to do your research and take all factors into consideration so that you can protect your investment.

Assess Your Fiscal Situation

Before taking any steps whatsoever, the most important thing for you to do is to accurately and honestly assess your financial situation. Buying a functioning financial firm may not be as big of an investment as starting a financial advisory firm from scratch, but it is still important for you to clarify for yourself exactly what is within your reach.

Do not move forward on any potential acquisitions until you have thoroughly scoped out how much financing you have on hand, and how much you can potentially borrow from your bank. If you do need to take out loans, find out how long of a term you can get to pay back any loans you take out.

While no venture of this kind is without risk, assess how much you expect yourself to be able to pay back in that time, even in the event that your newly acquired business sees an unfortunate decrease in income or client losses.

Do Your Research

Doing your due diligence is vital when making such large financial decisions as buying a financial advisory firm. Go over the business’ financials and history, as well as the culture of the company and what approach they take when caring for their clients. All of these factors, big or small, will paint a portrait of the practice as it stands, and let you know if it seems like a good fit for you in particular.

Check the Books

Likely the most important factor to consider is the financial state of the business. There is no one-size-fits-all method for making this evaluation, but there are a couple of different ways that you can get a solid picture for yourself.

A good first step would be to see if the seller has had the advisory firm valued or appraised. If so, make sure to review any reports generated. In conjunction with this, find some similar businesses for sale and compare the prices to that of the business you are hoping to acquire. Make a MyCompass profile today to see advisory firms that are available for acquisition.

While these will not likely be one-to-one comparisons, it will help you find a general baseline for what such a practice may be worth.

If the seller has not had the business appraised, consider doing it yourself. This could potentially be crucial, especially if you personally are not sure of what red flags to look out for. The accountant or appraiser will also likely be able to give you some assessment of the potential of the business to generate revenue after any transition. If you do decide to work with lenders to finance your acquisition, they likely will require this valuation anyhow.

In addition, take a look at the revenue of the seller’s business in the past 12 months, as it is likely that the seller will try to price the business at two to three times the revenue generated. While this can be a decent place to start negotiations, bear in mind that past revenue does not necessarily translate to future income.

The true value of the company is not easily gathered from income alone, but rather from an assessment of how likely the existing clients are to stay with the company, and whether those clients can be counted on in the long term.

Learn About the People

As a business that works with intangible assets as opposed to product sales, you can learn a great deal about a financial advisory practice by learning about the company’s culture. In any sale of this kind, it is natural for current employees to be nervous about the security of their job. It is best to face this head-on before making any final decisions.

Talk to the employees and get a feel for their plans and hopes for any transition, and compare that with your own goals. Try and get a sense of whether the staff is likely to stick with you through the transition, and if they are people you can see yourself working with. While some turnover may be expected, an uncomfortable change can cost you the cogs in the machine you are looking to purchase, as well as clients that may choose to leave with the advisors they are comfortable with.

When learning about the current clients of the advisory firm, there are a few major factors to consider. Try and see if the clients not only generate current revenue but if they are likely to continue bringing in business. Learn about any transition plans the clients may have, such as if the owner is aging and due to retire, and who might succeed them.

Gaining an understanding of the existing clients and their intentions is likely the most important part of this entire process. Retaining them is what your potential success hinges on, and client loss is one of the most common pitfalls when acquiring an advisory practice.

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Properly Plan the Transition

Once you have a good understanding of the employee and client culture, get to know the protocols of the seller’s business. Make sure that they align with your preferences and what you are comfortable with. For any chance of retaining the existing clientele, you want a smooth transition from the seller’s ownership to yours. It is vital that moving forward is seamless on the clients’ side.

Address any concerns that the staff seems to have, and if possible, try to meet with the clients directly before making any purchases. Ensure that the protocols and standard practices of the seller’s business align with your own preferred methods, as making major changes in that sense could be catastrophic for your transitionary period.

Bear in mind that most existing clients will have no obligation to stay with the financial advisory firm after it is transitioned to you as a new owner. Making sure that they are satisfied and comfortable should be your greatest priority.

Take the Time You Need

No matter how good of a deal you think you have in front of you, the best way to decrease your financial risk is to take as much time as you need to determine the potential pitfalls. Rushing into negotiations without having enough information on the competition and similar practices can lead to some major issues down the line and major losses on your investment.

Beyond the risks reviewed already, also consider how ready you are to make the switch to the business owner, and how comfortable you will be behind the reigns. If you are confident that you are ready for the move, make sure you are entirely prepared for the future, including your plans to get out in the future.

Speak with the financial professionals at Succession Resource Group to learn how to make the most out of your potential acquisition, and what steps you should take next. Get in touch today for a consultation.

Topics: Acquisition
David Grau Jr.

Written by David Grau Jr.