3 Key Considerations When Buying a Book of Business

Nobody likes to get burned by a decision.

But if you’re reading this, you want to grow your business. As
we transition to a new generation of financial planners, one increasingly
popular way to find growth is through mergers and acquisitions.

Buying a book of business is certainly an option when you
are looking to grow exponentially. But just as it’s important to
select the right clients
to work with, you need to select the right
business to purchase.

When looking to acquire another business, there are three main points to consider.

1. Don’t Overlook Past Market Valuations

Recently, I was reviewing some financial planning firms that were sale and some valuations were extremely high.

If you’re the seller, you want your business valuation to be
as high as possible. But as the buyer, you are looking for a valuation that
reflects not just current conditions, but what to realistically expect in the future.
Although it sounds counter-productive, a good way to do that is to look at past

Start by asking yourself what the current valuation is based
on. Is it strictly market performance, an effective money manager, or
outstanding customer service? And then compare that valuation to one from the
past. The year 2010, for example. 

Following the financial crisis, we have seen a sustained
bull market like none other in recent memory. If the valuation is based on market
performance, the value of the practice is questionable, as anyone could grow
the business in the backdrop of the bull market post-financial crisis. What did
the valuation look like in 2010, before the sustained bull market?

In some cases, the money manager might have outpaced the
market and is driving the valuation. In this scenario, you need to determine
the longevity of that manager. How much it will take to keep that person
incentivized in the future, especially if that person is in the office?

Finally, you want to understand the service models and if
they are aligned with your current thinking.

Growing the business organically, without respect to market performance, is an ideal situation.

2. Understand the Metrics and the Opportunity

It’s important to look beyond surface metrics when
considering buying a business. That is, don’t base your decision on the obvious

  • Revenue
  • Gross product
  • Net profit

Although those factors need to be considered, it’s important
to look past them. Many times, the increase in value to the purchasing firm is
to trim costs through economies of scale which typically leads to loss of jobs
and morale issues.

Instead, you should be looking at the metrics of the client
base and the opportunities that might exist.

In a recent advertisement for several financial firms being
sold, the average age was 59. That block of business might complement your
existing business, but it might also create new opportunities for guaranteed
income, estate planning, beneficiary reviews and next-generation planning. Are
you willing to expand your practice to include services those clients will need
in the near future? If yes, great. If not, you will be doing your clients a
disservice and potentially hurting your existing reputation. Think about the
changes you need to implement to grow the business exponentially.

When I talk to advisors about their marketing and client acquisition plans for 2020, I hear more discouragement and frustration than anything else. Do any of these answers sound familiar?

3. Review the Income Strategy

Many financial planners are looking at succession planning
for their clients. Those clients are in their mid to late 50s. Our research has
shown time and again that traditional systematic withdrawal provides a level of
risk in income planning. A less risky option is the Income Alpha strategy. It allows
clients to set aside a certain amount of assets for pure growth which will
enhance the assets under management growth in the long term. Without similar
income strategies, the assets in the book of business are likely to deteriorate
over the next several years.

The income strategy should be considered in the purchase price.
With current valuations nearing three times the gross revenue, the wrong income
strategy is a recipe for disaster for the purchaser. Having a strong income
strategy for older clients makes sense for the clients and the value of the
business. With the appropriate strategy in place, there should be a multiplier effect
on the value of a business as assets grow. Additionally, passing those
additional assets to the next generation will help grow and retain the
beneficiaries’ assets in the future.

Educate Yourself
Before You Buy

We all want to grow our business exponentially. Buying and
merging with businesses is sometimes viewed as the easiest way to do it. And,
with the current age of many planners, there will be ample opportunity to buy
books of business. But, just like any other big business decision, acquiring a
business requires you to do your homework.

Make sure you understand the direction of the firm when
considering a book of business with clients nearing retirement age. The
negative flow of assets may represent a unique look at the value of the
seller’s book of business.

Transformational Tactic

Don’t get burned by high valuations. Think before you buy. Seek to understand what is behind the numbers. Don’t buy a business that doesn’t fit your goals for growth.

Recognize the opportunity to transform your business by taking our free course.