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October 27, 2022   /   K. Lee Graham

Buying a book of business to grow your existing practice is a big leap for your financial practice. It’s not just a way to scale. When you buy a book of business from another financial advisor you purchase their customers’ dedication, trust, and loyalty. It puts you in a unique position to balance your practice’s growth while catering to an entirely new set of customers’ unique financial needs. But an acquisition also comes with financial and intangible risks to your existing practice.

The right business acquisition will put your financial practice in a position to onboard new clients efficiently and effectively. But how do you know if you should buy a book of business: is it the right fit for your customer management style? Will the clients want to stay with your practice? Is your practice ready to intake customers? Are you paying the right price for the book?

Ask yourself these 5 questions before you buy a financial advisor book of business to grow your practice.

1.      Is There Client Synergy?

Buying a book of business from another financial advisor is only a successful growth tactic if you can successfully retain customers after the merger. Synergy between your book of business and a new book could help reduce the risk of customer defection. Clients from the book you’re buying will be more likely to understand your value, processes, and business model if there’s synergy between the practices. Synergy indicates a higher likelihood that they’ll stay.

This is especially true for advisors that specialize in the growing sector of ESG and/or impact investing. Clients of these practices often select a mission-driven financial practice that shares their philosophies and values. If your practice doesn’t align, retaining new clients may be an uphill battle.

Synergy should also be discussed in the context of account management between the books. Examine the processes used to manage both financial practice books of business. How does your client management align with the financial practice you’re purchasing?

Consider a loyal client from the new book that’s been with their advisor for the last 15 years. They may be accustomed to a certain level of communication, service, and client-facing interaction. If you can’t offer that at this time, you jeopardize their loyalty and trust in you, their new advisor. It may be more difficult to retain them if you need to introduce a new style of communication, investment management, and service.

Ask yourself if your processes could be extended to new customers as they currently exist. If you would you need to make substantial investments to change your processes for onboarding and managing the new book of business, consider purchasing a more closely aligned practice.

2.      How Was the Book of Business Valuation Calculated?

When deciding how much a book of business is worth, appraisers often calculate a purchase price using a standard multiple for the yearly revenue of the book. However, current valuations rely on data from the most recent years. And our most recent years are not necessarily indicators of long-term performance because of outlier behavior and data.

Decide how much you should pay for a book of business based on the most accurate projections available. Try to obtain monthly breakdowns for years that exhibited ‘outlier’ behaviors like those induced by the pandemic. Annualize ‘normal’ months instead of taking yearly data at face value to get a more accurate idea of how much a book of business is worth in 2022, onward. This method should help you gauge long-term revenue potential over stabler conditions.

Certain intangible qualities of the book, like client goodwill, are also harder to value. When determining how much you should pay for the book of business based on goodwill, you may want to consider turn over rates, client retention rates, and cross-sell rates (how often did a customer elect for additional services after their base service). These are all statistics that indicate the book of business is full of ideal customers with healthy spending behavior for your practice.

If the numbers are healthy, it should be reflected in the business valuation. Be wary of valuations that inflate the value of client loyalty if these key performance indicators say otherwise.

3.      Will the Seller Help Transition the Book of Business to Your Financial Practice?

Seller involvement can be a crucial element of client retention during a transition of business ownership. A seller that stays involved after the purchase bolsters the chances that the book retains its purchase price value.

An involved seller will help walk clients through their transition to your leadership. They’ll get the news from a trusted partner to whom they feel loyalty. The seller increases the value of their book of business by improving retention rates. And you, the buyer, maximize the potential return on your investment.

You should account for the benefits of a highly involved seller when determining how much you are willing to pay for a book of business. Though the purchase price will be higher, you may have a much better chance of a higher return on investment than if the seller walked away as soon as you sign the dotted line.

Before you buy a book of business be sure to inquire about the level to which the seller is willing to advocate for your leadership to their roster of clients.

4.      Are You Using the Business Acquisition to Pivot Your Revenue Model?

Some advisors transition their business from a commission-based model to a fee-based practice by buying a new book of business from an existing fee-based advisor. This type of acquisition accelerates your jump into fee-based planning as opposed to gradually transitioning an existing book over a long period of time. However, if you’re planning to buy a book to accelerate a transition to fee-based planning make sure you lay the groundwork first.

There are a couple of things you’ll need to do in your own practice to prepare for a transition that pivots your business model. The most important, if not the most obvious: make sure you’re registered as a fee-based advisor in time to onboard the new accounts. The book is only valuable to you if it’s a client base you’re allowed to service. Perform your due diligence to make sure you’re acting compliantly based on what you’re legally allowed to offer.

Secondly, prepare your existing audience for the change in their services. Before making the announcement, tailor communications to explain what their new fee structure will cost, why it’s better for their account management, and what they can expect from you moving forward. Communicate clearly and often to help both your existing client base and your new book of business feel confident in your value as their new advisor.

5.      Do You Need to Finance Buying a Book of Business?

You may need to finance your acquisition of the practice, depending on how much the book of business costs. If the sale of the book of business is time sensitive, make sure you come prepared with financing options that you can move quickly on. Putting a financing plan in place before the negotiations start helps you become a more competitive buyer that can strike while the iron is hot.

Putting a financing plan in place before negotiations start makes you a more competitive buyer that can strike while the iron is hot.

Check Your Eligibility

Not all business acquisition loans are alike. We recommend looking for a loan that offers long-term, patient capital.

Our recommendation for buying a book of business is often the SBA 7(a) loan. This loan program can be great for acquisitions because of its 10-year repayment term (30 years if real estate is involved), fully amortizing terms, and competitive interest rates. Financial advisors are especially a good fit because of the flexible collateral requirements of the 7(a) Loan Program. Though valuable, a book of business is priced for its intangible worth. It’s not something a bank can collateralize. The SBA loan makes it possible to secure competitive financing for the purchase even if other comparable business loans are off the table.

However, you’ll want to prepare for financing in advance if you plan to utilize the 7(a) program most efficiently. The SBA 7(a) loan application is detailed and document-heavy. You’ll need to approach the table ready to move quickly with your lender if want to use an SBA loan to buy a book of business.

Pre-Qualify for a business acquisition loan from West Town Bank & Trust online to get ahead of the process. Our Director of Financial Advisory Lending will reach out to discuss your business goals and loan options in more detail to give you a jump start on the financing process.

Pre-Qualify for an SBA Loan for Business Acquisitions in Just Minutes:

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About West Town Bank & Trust: A financing partner should reciprocate the level of trust you’ve built around your practice. With a 100-year+ community banking history, West Town Bank & Trust works with entrepreneurs across the US to grow their businesses with proven financial solutions.

Whether you’re interested in purchasing another book of business, facilitating growth without restricting cash flow, or getting a better interest rate on your existing loan, our team of industry experts is here to help you seize the opportunity. Learn more about solutions for financial advisors from our Director of Financial Advisory Lending.