BUYING SELLING & COMMON SENSEREALISTIC, PRACTICAL INSIGHTS ON BUYING OR SELLING A FINANCIAL BUSINESS.

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BUYING, SELLING & COMMON SENSE//

BUSINESS ACQUISITION,SUCCESSION AND YOUIt’s time to buy a new car and the latest models—with their advanced technologies and sleek designs—have never been more appealing. Because you’ve done this many times before, you know that one of the first steps is to determine the value of your current vehicle to ensure you get maximum trade-in or sales value.

Where do you turn? To the Kelley Blue Book of course. With a few page-turns or mouse clicks you check the boxes and in just moments come up with a number that is reasonable and valuable.

The same is true of an even bigger ticket item such as your home. You start with Zillow to get a rough estimate for what your house is supposedly worth. It makes you feel good. As you get more serious, you contact a real estate agent who quickly runs some comps—comparisons of what similar homes in your area have recently sold for—and, bingo, you have your number.

If only buying or selling a financial business was as simple and easy. Unfortunately, there is no Kelley Blue Book for advisors and, as a result, it is important—perhaps critical—that you begin early on to understand the key factors that might play an important role in this process and your future.

START EARLY. PLAN THOROUGHLY.

IN THIS ARTICLE:

THINGS TO KNOW ON BUYING & SELLING

5 Just like you tell clients, you

need to plan ahead. See the following for some smart steps.

SUPPORT

4 Forget wild speculations. Take a hard look at how businesses are really valued.

VALUATIONS

3 If you’re buying a business,

you want it to be all that was promised to you.

BUYERS VIEWPOINT

If you’re selling a business you built over a lifetime, you want the most for it.

2 SELLERS VIEWPOINT2

Adjust expectations early on and you’ll be in better

shape to enjoy the results.

1 BE REALISTIC 1

1 BE REALISTICAs either a buyer or seller of a financial services business, the number one thing to keep in mind is this: don’t set your expectations too high or too low and risk major disappointment or even demoralization in the process. It can be devastating to have locked in a number in your head only to realize that the person on the other side of the table is in a different ball park.

Ease yourself into this process and realize that each player has very different goals in all

likelihood. It is rare that two individuals can sit down over a cup of coffee, agree on a price, hammer out the details, and call their lawyers to draw up an agreement.

Knowing this, the most important preparation you can make is to commit to being open-minded, and either paying more than you thought or getting less. And please—consult with professionals who have a history of successfully brokering such deals. Experience and expertise are irreplaceable.

BUYING, SELLING & COMMON SENSE//

The most important preparation you can make is to commit to being open-minded

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SELLERS WANT BUYERS WANT

100%DOWN

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BUYING, SELLING & COMMON SENSE//

“Selling” a business is better understood as a transition where the former owner is still actively involved for around 12 months.

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2 WHAT SELLERS WANT This one is simple. Sellers want the most amount of money in the shortest possible time with the most advantageous terms. And they want 100% cash at time of closing. They also want to make sure their clients are being taken care of. Drilling down a little deeper, however, there are some very important factors that someone who wants to sell a business should keep in mind.

Sellers can seldom expect a buyer to stop by and drop a big check on their desks with a note saying, “Go enjoy your golden years and don’t worry about a thing.” Instead “selling” a business is better understood as a transition where the former owner is still actively involved for around 12 months.

This will mean letting go of some beloved practices and refraining from saying, “In my day, we used to…” These months will be about listening and helping. About watching change without influencing it. And, above all, about truly having the buyer’s best interests in mind.

12 MONTHS

MOVING FROM BUSINESS DESK TO BEACH CHAIRTransitioning your business is about working through

a process rather than just turning over the keys.

BUYING, SELLING & COMMON SENSE//

3 WHAT BUYERS WANTIt comes as no surprise that buyers want to pay as little as possible for a business that is thriving and has the potential to grow. They want 100% client retention and they want the former owner to help, not hinder, their efforts.

Where sellers are looking for a bottom-line number, buyers like to see continuity, growth patterns and consistency. They look carefully at the age and demographics of a client-base. They see value in a book of business as a shortcut to reaching their revenue goals and they look at it with an unsentimental eye—often a jarring note to an older, retiring advisor who has invested years to get to this point.

Another factor is the quality of the revenue. Is it recurring, are there advisory fees, is it transactional? Inefficient or sporadic income—even if the numbers are large—can be difficult to value. The bottom line is simple: no buyer wants to purchase a business and slowly watch it dissolve away over time.

Buyers look carefully at the age and demographics

of a client-base.

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GROWTH PATTERNS

QUALITY OF REVENUECONSISTENCY

CLIENT RETENTION

PREPARE YOUR BUSINESS FOR WHAT BUYERS VALUE

BUYING, SELLING & COMMON SENSE//

4 FACTORS FOR TRUE VALUATIONSMany companies exist to help individuals and firms determine the value of a business. It’s not an easy task and involves a large

number of factors that are often not easily quantified. It’s safe to say that every seller thinks their business is worth more than it is and every buyer thinks it is worth less.

For that reason, it’s best to think in terms of ranges rather than hard and fast numbers. No one will be writing a figure on a

napkin and sliding it across the table. Rather, there are some guidelines that the industry has traditionally followed: around two times trailing 12-month revenues and/or four times firm earnings. These are just starting points however and expect them to move up or down significantly.

Finally, and most importantly, any business—like any home—is worth exactly what someone is willing to pay for it. Despite the fact that a business was built on blood, sweat and tears, long weekends and late nights, in the end it is simply a financial transaction. The sooner emotions can be removed from the equation the better.

Any business—like any home—is worth

exactly what someone is willing to pay for it.

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TRADITIONAL INDUSTRY VALUATIONS

REVENUE2X

// EARNINGS4X

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BUYING, SELLING & COMMON SENSE//

5 HELP IS IN THE WINGSYou need professional help. Buying or selling a financial business is complex in pricing and complex procedurally. As temped as you might be (like listing and selling your own home to save on realtor fees), avoid that temptation. There are firms that do exactly this work—in fact Advisor Group has an entire department dedicated to it.

Certainly, understanding valuation and negotiating a price is at the core of any transaction, but so are some other critical issues. Financing options can greatly affect outcomes and satisfaction for both parties. Taxation issues

play a key role. Nailing down specifics on commissions, trails, terms and payments are critical. Understanding liabilities, cash flow models, debt, and departure times are better hashed out in advance rather than in court.

In the life of every business, the issues of succession planning become part of retirement discussions. Planning ahead for that day, and aligning your business for an eventual transfer, is one of the smartest things you can do. Remember, like you regularly tell clients, don’t wait until it’s too late to start planning the next stage of your life.

Although “50 buyers for every seller” is often quoted, a better understanding is that there are 50 people kicking the tires. However, when sellers have created an attractive business, they are certainly in the driver’s seat. And a buyer will find them.

Don’t wait until it’s too late to start planning the next stage of your life.

UNDERSTANDING THE PROCESS

2020

PLANNING

TRANSACTION

TRANSITION

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