Three Things Advisors Should Consider Before Buying A Financial Advisory Practice

A practice acquisition can be both an exciting and daunting experience for the first-time buyer. As with any major transaction, it’s important to do your homework and to take the time to learn the process, potential challenges, and what you need to have in place to make a successful transition. To aide in that process, we interviewed Barron’s Hall of Fame Advisor, Jonathan Kuttin, who has made a number of acquisitions over the last several years. In our interview he shared three things advisors should consider before buying a financial advisory practice.

How Will It Create Value for Your Practice

Most acquisitions aren’t a straight transfer of value. Some may cause a temporary dip in value to the overall firm due to the addition of staff and expenses. However, Kuttin notes that, “many times you can create additional value above the purchase price rather quickly, if you are able to transition those clients to supplementary product and service offerings not currently provided by the seller.” In those situations, the seller is still getting fairly compensated for the value they created in their practice, but the buyer is also able to see gains on that initial investment faster, because they can quickly engage and cross sell products and services like financial planning and insurance. “Sometimes it may take a while for the acquisition to generate positive returns,” adds Kuttin. “Ultimately though it should generate value beyond the GDC you initially acquired and easily cash flow any debt you had to incur to buy it.”

Who Is Going To Run It

“It takes strong leadership to successfully manage an acquisition,” says Kuttin.  “At some point you have to decide if you have the bandwidth to manage and serve those extra clients or if you need to bring someone on to do that for you.” This is especially true if the acquisition is outside of your local area or if it will significantly increase the number of clients on your roster. Some acquisitions are structured to be “sell and stay” situations where the selling advisor can stay on and continue to serve those clients. However, in most cases, the seller is only retained for a period of 1-3 years in order to help transition clients and minimize attrition. This is why Kuttin advises that, “If you want to do multiple acquisitions and grow, you need to build a bench of strong leaders who are ready to take on that responsibility when the opportunity arises.”

How Will You Onboard Those Clients

Many advisors like the idea of increasing their client list quickly with an acquisition, but they often overlook the logistics and workload associated with bringing on an extra hundred or more clients in a matter of weeks. “It’s important to have a plan for reaching out and engaging with those clients and tapping them into your client service model,” says Kuttin. Generally, acquisition contracts are structured so that the seller is obligated and financially incentivized to assist in the transition. “But ultimately, you need to ensure you have the systems, processes, and staff ready to take on that extra client base,” adds Kuttin, who also stresses again the importance of having a bench of talent ready to go. If you plan on retaining the staff, this may help with the onboarding process. However, Kuttin explains that you want to have a plan for training those team members on your processes to ensure that the practice is fully integrated into your firm.

Overall, it’s important to prepare yourself, not just for the transaction, but for fully taking on the day-to-day responsibilities of running the practice and serving the clients. For new buyers we always recommend engaging with an acquisitions consultant who can help you negotiate the deal and with a lender who can help with financing, long before you start discussions with a potential seller. An acquisition can add tremendous value to your firm if done right or create long-term headaches if you try to handle the process yourself without seeking advice from seasoned experts first. 

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