The Empathetic Buyer™

The Contradiction

Virtually every article one reads about practice management focuses on avoiding your services to clients becoming a commodity. With the advent of robo-advisors and the increasing popularity of passive investment strategies, advisors are told to develop Value Propositions to make their services to clients about more than the numbers. Then when an advisor wants to sell his/her practice, the buyer determines the value of the book on some multiple of revenue or cash flow and based on whether the revenue is transactional or recurring. There is very little credit given to the intangibles of an advisor’s practice until asset levels reach $500 million or more, and even then it is about systems, rather than culture. It is a contradiction to that which the advisor has heard over the last decade or more.

For buyers, an acquisition is almost entirely a financial transaction, as it should be. As a consulting firm, often helping advisors acquire or sell, we focus on cash flow and the likely percentage of transition of clients and assets, more than on the value-added characteristics. With that said, we all should pay close attention to the intangibles of a prospective acquisition, because many of the clients came to this firm due in part to cultural points of difference.  In addition, it is critically important to understand the potential seller’s mindset.

Life’s Work

For most sellers, the sale represents the culmination of their life’s work, the handing over of their clients and friends to another steward, and a change in their life from trusted advisor, to former trusted advisor. The very state of mind that makes an entrepreneur successful; a desire to control his or her destiny and build something based on his or her vision and belief system, vanishes with one stroke of the pen. A big check, while very nice, rarely eradicates subsequent seller’s remorse. Many sellers tell us that even though they know that a good advisor has purchased their firm and the clients will be well taken care of, a profound feeling of loss creeps up on them that is far more disheartening than they had previously envisioned.

For the advisor with little or no future plans for retirement, this can be both discouraging and downright frightening. By the way, “my spouse wants to travel,” or “I play golf” do not pack the positive punch it takes to mitigate these feelings.

The Empathetic Buyer™

This dynamic sets up a situation in which an advisor-buyer who is not willing to be sympathetic, or at least empathetic, with what the seller is experiencing can easily say the wrong thing at any point along the process. It is not necessarily the buyer’s fault. This is especially true of a first-time buyer. He or she is so focused on getting the numbers right that the feelings of the seller seem to be less consequential to the process. The assumption, often incorrect, is that the seller would not have entered a negotiation if these emotions had not been dealt with.

My personal significant experience with sellers, while anecdotal, is that they have almost never dealt with the reality of these emotions, even if it is clear to them that selling at this time is the right course for them and their family. It is tantamount to losing a spouse. You may have considered how you would feel, but until it actually happens, you cannot really imagine how you will feel or deal with it emotionally. Being in a position of trust from your clients and the inherent feeling it creates when you help one of them is a powerful, seductive drug that it is very difficult to wean yourself from. At the risk of sounding sexist, I have found that this is particularly true of women sellers who are in their 60s and 70s. This has very little to do with a woman’s emotional makeup and a lot to do with what they had to do to be successful in the last 30-40 years. Think about it. In the mid-1970’s and into the 1980’s there were very few truly independent advisors. Of that group, there were even fewer woman advisors. Today among Certified Financial Advisors, (CFP), only about 23% are women. Imagine what that number was in say, 1979! Those who became successful had to fight hard against stereotypes and the “boy’s club” nature of the business. Those who have survived and thrived to today should be celebrated for what they have done for the business as a whole, and for woman advisors in particular. How would you feel if you spent 30 years competing with people who looked at you as a usurper? My point is that all seller-advisors deserve our respect, and particularly those women pioneers in the business.

It is true that the larger the firm or practice you are buying, the more of a business decision, as opposed to emotional one, it becomes for the seller. It makes sense that a firm which has grown to $500 million or $1 billion in assets under management might be run more like a business than a practice. Systems and accountability standards are usually in place that are absent in much smaller firms. These larger firms command higher multiples in today’s marketplace. The advisor will still care about his or her clients and will be proud of what has been built, but there is a good chance that the emotion of the transaction might take a backseat to the pure business metrics of the business and the transaction. Advisors who have spent an entire career, perhaps 30 or 40 years, in the industry and only accumulated say $30 million or less, do so for several reasons. One of those reasons that we see time and time again, is that they have trouble making major decisions with long reaching ramifications. Advisors with $200 million or more in AUM have less trouble making decisions. As a buyer, I personally would much rather work with advisors who can make reasonable informed decisions in a timely fashion. This again argues for books of a little larger asset base. This is not to say that the smaller books are of no value.  There are a lot of other and legitimate reasons why a book may be small. My point is to be careful to investigate not just the metrics of the book, but the motivations and mindset of the person selling it.

To add to the emotion that a sale naturally stirs up, consider the advisor who intends to stay on for a few years. Most of our clients want the advisor to stay on for some period of time to help affect the transition, but some advisors want to stay longer to ease their way into retirement. This can be very beneficial to both buyer and seller. However, this creates a scenario in which a former owner, who is used to calling all the shots in his or her firm, and may have never had a partner to consider, is now working side by side with the buyer who is the person in control. If you think former trusted advisor is hard to swallow, try for a month or so being the person formerly in control. Many times, books and practices are financed by SBA Loans, (see a later chapter). To qualify for such a loan, the former owner cannot retain any control or management responsibilities. Both the seller and buyer really have to think about how to treat the seller who stays on and whether he or she will be able to work under those conditions.

It’s Really Happening

In our experience, the most sensitive and dangerous period in the entire acquisition process, is that between the signing of the nonbinding Letter of Intent, (offer letter), and the Closing Date. Once the seller accepts in principle the terms of the LOI, the sale becomes very real for him or her; perhaps for the first time. The fastest way to determine how serious someone is, is by writing it down. Discussion is free-wheeling until someone codifies the points so that both sides can react to the written word.  

The emotions discussed above are multiplied exponentially and the likelihood of second guessing, and other forms of “seller’s regret,” rise with it. Do you remember when you were a child on a long car trip and just looking at your brother or sister wrong could start a fight? It only takes one statement to a sensitive seller during this period to cause a serious breakdown in communication, and even trust between buyer and seller. Think, “walking on eggshells.”

Here is an example of a very simple mistake that I saw made today. I was on a call with a seller and a loan broker. We were there to explain a $200,000 difference in a loan that my client was seeking on a deal that would bring the seller $2 million at the Closing. The 71-year old seller was concerned about the difference and the fact that the bank was now asking him to carry the $200k loan to go with the $2.6 million loan that the bank was providing. Ultimately, the seller would still get his money, and overall, it was not a great deal of money, but it was new information to the seller. The loan broker made the comment, “Come on Bill, it’s really not much money.” He did not mean it maliciously, but it was certainly the worst thing that he could have said to the seller at that point in time. You can imagine that the seller’s response was, “It would be, if it was your money!”

Here is another. Two advisors were trying to purchase a third advisor’s business. Both firms did a large percentage of their business in managed accounts but managed the money in a slightly different manner. They each did a version of financial planning that was similar, but again, a tad different. The woman seller asked if she could stay on as a consultant to keep her hand in for a couple of years after the sale, until she turned age 70. Their response to this 40-year veteran of the business was, “Sure, as long as you do it our way.” (Using the name of their firm, as in, “As long as you do it the Casey Corrie way.”) Now there were other ways to get the point across without telling her in so many words that the way she had been doing things for all those years was unacceptable and that perhaps she was not as professional as they were, (which was exactly how she took it). Was she too sensitive? Perhaps, but they needed her on their side during the transaction and the transition. This comment, along with several others, caused her to pull out of the deal, because, she “did not feel she could trust them.” Was she wrong? Possibly, but when you are deciding who is going to service your clients for the future, and in her case, deciding who she would with for a few years, everything they say counts.

I know what you are thinking, “These are adults, why should I walk on eggshells?”  “Why do I have to kiss their rear-ends? It is a business decision, nothing more.” I am here to tell you that it is more than that to a seller and the moment you forget that, or chose to forget it, you jeopardize your chances of success.

In a competitive seller’s market, such as exists today, it is important to be an attractive buyer. Paying attention to the seller’s feelings is just as important as the numbers. Some studies indicate that for most sellers, the transaction is 60%-70% emotional, and only 30%-40% financial. The more you are perceived to understand the seller’s emotions, (or at least that you are attempting to understand), the more attractive you become as a buyer.

Common Sense

This all may sound like common sense. One should be sensitive to the feelings of the person you are negotiating with. We have seen buyers spend hours working and reworking the numbers, meeting with bankers, only to blow the deal by making the seller feel as though he or she is less important than the numbers. It’s a rookie mistake. Bottom line, if you are purely a numbers person, find someone on your team or an outside consultant, who can stand between you and the seller to make sure you are being duly sensitive to what they have accomplished and the emotions that the seller is almost definitely experiencing. A first-time buyer can make a lot of mistakes. This one is to be avoided at all costs. It can literally be the difference between success and failure.

One of our clients, Keith, is a very good advisor and business man. He is great with clients, but he is rough around the edges when he is negotiating. He “thinks out loud” sometimes and speaks in a way that can seem insensitive. Those that know him are aware that he genuinely cares about people, but he can easily come off otherwise. Keith was smart and self-aware enough to know that this characteristic could get him in trouble with a sensitive seller. So, he did two things. First, he let me do most of the communication with the seller. Second, when it was important to discuss sensitive issues with the potential seller, he asked his partner, Linda, a woman with excellent communication skills to handle it. We had a few speed bumps, but ultimately the strategy worked. 

As a consultant, I have often played the role of buffer or the target of a seller’s anger. In some cases, buyers and seller’s look at me as someone they can try ideas out before they present them to the principle in the transaction, because they know that anything I say, must later be approved by another party. In a few circumstances, I have been the buffer for the seller’s anger. Anything controversial gets presented by me. That way the seller can explode, (oh yes, some do!), and get it out of their system and then we work it out without both sides creating an adversarial relationship. The advice here is to either find a consultant or someone in your firm to help, if you do not believe you can play the role of Empathetic Buyer.

Casey Corrie

First-Time Buyer Series: Consulting Agreement

It is very common for a seller to stay on as a consultant for some period of time, even after he or she has sold the book of relationships. As we have discussed in previous articles, this can be emotionally difficult for both the Seller and the Buyer for several reasons. The Seller has always been in control of his or her relationships with the clients, as well as making decisions about everything from financial planning and investment decisions, and even choices made regarding employee matters, The Seller must come to grips with the fact that if he or she stays on, those decisions will all be made by the new owner of the relationships. For the Buyer, he or she has to find a way to work with another strong personality in the office, while trying to convince clients, and possibly staff, to see him or her as the new and future leader.

There is no doubt that the Transition of accounts to the new Buyer has a much better chance of being successful if the former owner stays on to enthusiastically endorse the new owner as his or her chosen “successor.” Under favorable circumstances, this situation can be the difference between a successful Transition in the 95% plus range and a conversion that is significantly less fruitful. It is all about developing trust with the transitioning clients; the face to face endorsement is a critical element.

In order to influence a successful hand-off of accounts, Buyer and Seller should enter into a negotiated Consulting Agreement. This document is separate, and in addition to the Definitive Agreement that is signed at the Closing of the sale. The Consulting Agreement, (CA), should likewise be signed at the Closing and take effect on the date of the signing of the Definitive Agreement.

It should be noted that if the Buyer is borrowing funds under a Small Business Administration, (SBA), loan, there are a number of conditions laid out pertaining to the role of the Seller, post-sale. The CA is a good way to codify the Seller’s role and avoid questions that can affect the status of an SBA loan.

The CA outlines the conditions under which the Seller will continue to work. Provisions of the CA include:

·         Services that will be provided by the Seller.

·         Non-Compete covenants

·         The Term or time period of the CA

·         Compensation- this is separate from any money paid on the book or interest on an installment loan. It is comp on services provided. This is usually a split of revenue.

·         Conditions of Termination of the CA.

·         Non-Solicitation covenants

·         Performance and cooperation to work with the Buyer. This usually covers such things as access to client files, access to staff assistance, office space, rules to follow, etc.

·         Designation as an independent party or “Independent Contractor.” This is important as it defines the relationship. The CA does not generally create any kind of employer-employee relationship; it does not allow the Seller to have any authority either.

·         Confidentiality covenants

·         Governing Law, i.e. the state and county that governs legal issues.

·         What happens if the Seller dies or becomes disabled during the time period of the CA? In other words, who get his or her comp and for how long?

·         Dates and Signatures as to when the CA is agreed upon

·         Health Insurance- this one is tricky. Many states, (IA and NE, to name two), no longer have insurance companies that will write individual health insurance. If your Seller is less than 65 years old, living in one of the affected states, he or she will have to decide what to do about insurance. The Seller could theoretically keep his LLC, but sell the assets, or there could be some accommodation in a Consulting Agreement. I am not advocating a solution here as much as mentioning that it is an issue that could come up.

It is a balancing act of sorts. Buyer and Seller have to address the issues without making the CA so rigid that decisions cannot be made as needed.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week.

Casey M Corrie, President

Moisson Partners, Inc.

Mergers. Acquisitions, Consulting, for the Advisory Community

www.moissonpartners.com

First-Time Buyer Series: The LOI to the Close; The “Enlightened” Buyer

When I majored in History in college, we studied 18th Century rulers, known as Enlightened Despots; absolute monarchs who pursued legal, social, and educational reforms inspired by the Enlightenment. In other words, they were kings and queens who were trying to provide a better life for their subjects, rather than just themselves. As with Enlightened Despotism, we are suggesting you practice Enlightened Buying. The time period between the Letter of Intent, (LOI), and the Close is the most critical and dangerous to your success in the process of acquisition. The transaction becomes real for the seller in a way that it has not before. As you will see, being enlightened and understanding might just be your best course of action.

The assumption is that the Seller has signed the LOI, which hopefully outlined what you are buying, the structure of the deal, and the price you have agreed to pay. It has outlined in somewhat general terms what role, if any, the Seller will play, post-Close. Now it is time to address the details of the transaction and the Transition. The document is usually called the Definitive Agreement. It should be drafted by an attorney.

When you present the LOI, you should set a date for the close. We used to give ourselves and our clients about 30 days to complete the due diligence, make any last minute changes to the offer, and go back and forth with the seller, to get the Definitive Agreement ready to sign. Over time, we learned that this is rarely enough time. You can do everything right. The Seller and you can agree on everything. However, attorneys work on their own time. Buyer and Seller each have attorneys to protect their interest. The Buyer has usually spent time with his or her CPA at this point, but the Seller will want to have his or her CPA look at the Definitive Agreement. We recommend you agree to 45 days, Be prepared; it may stretch to 60, but you do not want it to be too long, for reasons you will see below.

Do not make the mistake of walking into the Close with a Definitive Agreement that the Seller and his or her attorney and tax professional have not seen. This seems obvious, but advisors do it and it causes delay and quite often hurt feelings on the part of the Seller. It has killed deals before. We are sometimes asked to step in to salvage a deal that has gone bad; this one reason has happened more than a few times.

It is during these 45 days that we suggest you become the Enlightened Buyer, (if you were not before). Consider the Seller’s point of view. You have agreed to sell the business that it took you perhaps 40 years to build. You know it is the right thing to do; your spouse wants to travel and see the grandchildren while you are still young enough to enjoy the trips. But this is where you have gone to work 5 or 6 days a week, for those 40 years. The clients are your friends and even your family. You will now go from being their trusted advisor to their former trusted advisor. It is not like retiring from a company where you worked, you are the company. When someone asks you what you do for a living, you don’t give them your title at a company or say, “I work at Microsoft,” you say, “I am a Financial Advisor.” It is your core identity. The day of the Close, technically, you can no longer self-identify as such. Having worked with dozens of them, I can tell you it hurts.

Let’s suppose you will be staying on, either to effect the Transition, or you are going to work in the office under the Buyer’s umbrella for a couple of years. What does that prospect feel like? Prior to the Close, you owned the place. Everyone in the office worked for you. You made all of the client decisions; all the investment decisions. Now, someone else is making those decisions. How is it going to feel the first time you do not agree with the person making the choices? Sometimes, during the Transition, a Seller will actually get physically ill the first time he or she sees someone else’s name on one of the client accounts.

If you do not think this is an emotional roller coaster for a Seller, try this. For the next month, you make no decisions about anything. At home, your spouse or children make all of them. At the office, your staff gets to decide everything. (Of course for me, this would be no change. I make all the decisions and my wife tells me if they are right or not.) If you were crazy enough to do this, you would get just a taste of what is about to happen to the Seller.

Would this situation make you just a little touchy? A little sensitive? Trust me, it does. We are not talking about two big corporations where most of the negotiating is being done by faceless attorneys. This is a very personal transaction between 2 or more individuals, where attorneys really do not come into play except when it comes to the final documents. For 45 days, you have to walk on eggshells! All it takes is for the Seller to feel like you do not respect him or her as a professional and the deal can implode. At our consulting firm, this is such a sensitive time period that we make every effort to limit the time the Buyer and Seller spend together except in structured, meetings that are just short of scripted conversations. By the way, it is not necessarily the Buyer’s fault. The Buyer begins to look at the book as his or hers. This is understandable. Many times he or she is shocked when a comment causes the Seller to get upset. It is easy to do if you are not aware of how things sound to the other person in the room. You have to be hyper-aware.

Start by making sure the Seller understands that you empathize with what he or she is going through. Admit that you will make mistakes, (do this early and often). Watch body language and try to communicate in person or verbally. My biggest pet peeve about email has always been that you rarely get the emotion behind what someone is saying. Limit its use. Never, never, text. Think of it as worse than driving and texting. It is soulless. It kills deals. Have you ever misunderstood a text or email? Enough said. Trust is slow to build and quick to lose. Statistics indicate that when it comes to an advisor deciding to sell, 60% of the decision is emotional and only about 40% is financial. Given this, it is no surprise that a loss of trust in the Buyer can be one of the top reasons a transaction will collapse. A misunderstanding can cause a severe breakdown in trust and kill a deal.

This past weekend, I attended a Christmas Party for a client. My son also works there. I was for the first-time, introduced as “Adam’s Dad” rather than the “Consultant that helps our firm.” I am very proud of my son, but I also experienced a slight tinge of regret in realizing that I too am getting long in the tooth and my identity is changing in some peoples’ minds. This is miniscule, compared to what the retiring advisor experiences.

Finally, if you are not someone who has much patience with people’s emotions, find someone you trust and get them to do most of the communication with the Seller. This should start at the beginning, in your first meeting with the Seller, so they know that this person speaks for you. Do not let your ego or your need to control stand in the way of making a deal that could substantially improve your firm. Be Enlightened.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week.

Casey M Corrie, President

Moisson Partners, Inc.

Mergers. Acquisitions, Consulting, for the Advisory Community

www.moissonpartners.com

First-Time Buyer Series: The Letter of Intent

You have completed most of your due diligence. I say most, because as you will see, there is still more to do. You have modelled a couple of ways to buy the Seller’s book or firm that would work for you. You have even visited with lenders to determine in principle, if the models you have developed can be completed. You are ready to make the Seller an offer. The proper way to do this is in the writing of a Letter of Intent, (LOI), to buy. The elements of the LOI include:

·         Exactly what you are buying, (the RIA, the LLC, just the assets and clients, insurance,                  furniture, etc.)

·         The price you propose to pay, including the down payment

·         The structure; how you plan to buy the firm or book. (An earn-out, an installment sale, a            cash payment, etc.).

·         Plans for the owner, (work for a specific period of time, until the client assets move, or                some other period). This is the Management Agreement.

·         Any other agreements, (non-compete, non-solicitation)

·         Timing for the Close

·         If you plan to keep any of the employees.

·         A time limit on the offer.

Each of the bullets above represents a provision in the LOI. You want to be as clear as possible and try not to go into too much detail. Remember, there will be a Definitive Agreement, which will be signed at the Closing. This Agreement is very detailed and should be written by an attorney. We will discuss this in a future article. We tend to call the LOI a “wish list.” You write what you want to do, and give the Seller a chance to come back with his or her own “wish list.” Better still, you or your representative have spent the necessary time to determine the Seller’s desires. Then when you sit down to present the LOI, (please, do not ever mail or email an LOI!!), you can truthfully say that you have addressed all of the Seller’s desires. Notice, I did not say the Seller gets everything that he or she wants; I simply said that you indicate that you have addressed them. We try to make everyone happy so that the Transition will go well, but you have to stick to what works for you. This is why we suggest more than one model.

The LOI does not typically bind anyone to buy or sell; it simply expresses their intent. You generally want it said that this is “subject to completing the due diligence.” This could be said of both Buyer and Seller. The more time you have spent with the Seller, the better the chances that you will get a positive response to the LOI. In truth, if you do not feel you can compose a LOI that will please the Seller, do not waste your time, or the Seller’s, writing one. As will be addressed in our next article, the time period between the LOI and the Close, is the most critical period in the process. I will give one piece of advice; once you have presented the LOI, consider the text function on your cell phone turned off when it comes to communicating with the Seller. The reason should be obvious, but tune in next week.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week.

Casey M Corrie, President

Moisson Partners, Inc.

Mergers. Acquisitions, Consulting, for the Advisory Community

www.moissonpartners.com

First-Time Buyer Series: Due Diligence

The subject of granular due diligence is far beyond the scope of a short article. Obviously, you will want a valuation completed by someone used to performing the analysis. This could be by one of a number of firms in the marketplace that perform these reports, or a CPA, or even another advisor who has purchased several books in the past. In addition, any lending firm or bank you borrow funds from is going to perform a valuation, at least for purposes of projected cash flow. Take the data form from any of the above mentioned sources and you will have a good start. Or you can write to me at ccorrie@moissonpartners.com and I will send you the one we use for our own purposes, (no strings attached; just put “PMQ Request” in the subject line).

Keep in mind that your primary objectives are three-fold.

·         Determine the value of the firm to you.

·         Determine the likely cash flow that the firm or book will produce in your hands.

·         Predict the realistic percentage of clients and assets that are likely to move to you in a               transition.

A few tips:

Never pay for potential. You will no doubt encounter sellers who will say that while they have been slowing down in recent years and the revenue is consequently down, you should pay more for the book of relationships because you will be able to produce more revenue than the seller has. Do not buy that. You pay only for what the relationships produce, not what they could produce. Sure, you might buy the book for this reason, but it is not a reason to pay more for potential.

Look at each revenue stream individually and judge the likelihood of it continuing under your control. Ask how clients were sold and why the seller believes certain clients, especially HNW clients chose him or her. This is more than simply discerning between recurring revenue and transactional revenue. Sometimes a valuation algorithm cannot do the kind of dissection that you need to perform in order to figure out where the revenue streams come from. It might be a good start, but you have to look at product lines and where the revenue is likely to come from in the next few years. For example,

·         The seller may have a lot of alternative investments with his or her clients. When will                  they mature? How long will the asset be tied up? Do you have access to those same                    alts?

·         Is the seller advising on 401k assets? Do you have experience doing the same? 

·         Is the seller using products proprietary to his or her broker dealer? Or products where                the same internal fees are less to the seller than to you?

·         What platform fees does the seller’s managed accounts levy? Are these more or less                  than the platform fees with your firm? I am sure you know that the same clearing and                custody firm can be charging different fees in two broker dealers due the amount of                  business that that BD had with the custodian. You will have to decide if you will pass the            differential to your clients or if it will affect your expenses.

Some specialists lean heavily on the market approach to valuation. Some elements of this approach are perfectly acceptable. However, there is a difference in value between the business of a seller who manages the money and one who employs primarily 3rd party managers. Clients may prefer the former, because they feel the fees they are paying for the extra work is justified, or they may prefer an advisor because of his or her performance record in managing assets. As a buyer, you should prefer the advisor who employs 3rd party managers, (even if you do not). This is a book that is going to experience a higher transition percentage. Think about it. If clients come to you because of your personal performance record, what do you think they will do when you are no longer the advisor/portfolio manager? Correct! A lot of them will seek another advisor. On the other hand, almost any advisor can access the same 3rd party managers and if the clients are happy, they are likely to stick with an advisor who promises not to change anything right away. Make sure a specialist or valuation strategy you employ distinguishes between these two approaches to managing assets.

This next issue seems obvious, but some very smart people we have encountered have not given it sufficient weight in valuation. The closer a seller comes to the way you manage accounts the better you will do in the transition. Some years ago, we were asked to assist an advisor in completing a deal with a seller he uncovered. Our client was a heavy, (successful), technical analysis proponent. The seller was an 80-year old fundamental value investor who claimed he could teach Warren Buffett a thing or two. He performed deep research on every security he purchased. He also felt that technical analysis was “voodoo for people who don’t understand investing.” (A direct quote.) The odd thing was that in spite of our objections from the start, they danced around each other for 6 months. It was never about price. Each man thought he would be able to convince the other that some clients would prefer their way, so neither could bring himself to end the discussion. These were two smart successful men who just could not see that even if the sale took place, the transition would have been unsuccessful. The seller’s clients had been convinced for 50 years that his way was the best, (his performance was very good). At the end of the day, we were able to get the buyer to back off, but to this day, we think they still both feel they missed an opportunity to convert the other’s clients to their way.

The point here is to remember that an acquisition is only successful if you have a very high transition percentage. Our standard is 97%. This will never happen if you try to make a lot of changes to the manner in which client assets are managed. People do not like change. You do not have to be perfectly aligned, but if you are an active manager, do not waste your time with a group of clients who have been sold on passive investing, or vice versa. Don’t believe me? Try buying a committed DFA loyalist if you are an active manager. 

If there is no other take away from this article, we hope you will get that a valuation is just the beginning. In answering the important questions, the amount of examination you or your consultant performs can be the difference between an accretive transition and buying a silk purse, but transitioning a sow’s ear.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week.

First-Time Buyer Series: Psychometric Testing

Have you ever interviewed for a job with a large corporation? Have you ever sat for a career or personality assessment? If so, you have probably taken a psychometric test.These are standardized tests to assess everything from why you act certain ways to what kind of job you are best suited for, to how you respond to stress. Many years ago, when I interviewed with CIGNA and then with Merrill Lynch and Shearson Lehman Brothers, I was given a battery of these tests. The truth is, I always felt like I could answer the questions according to what I knew they wanted. “Would you rather be a forest ranger or a librarian?” Of course, the forest ranger demonstrates an active person, so a person who wanting to be in sales will be more suited to that than the sedentary librarian. With this as a frame of reference, for a long time I was not a big believer in tests, but I suppose you would say that I am an enthusiastic convert.

Certain psychometric tests are virtually impossible to “beat,” because they are not as straight forward as they used to be and there are a number of built in safeguards. One test we use sometimes, the Winslow Test, will actually cancel the results of the entire test if you are inconsistent in your answers, according to their standards. One advisor I know had to take it 3 times for this reason alone.

If these tests are utilized most often in hiring, firing, and even promotion situations, why am I suggesting they are useful in a buyer-seller relationship? The operative word here is in fact, relationships. As we have said many times in previous entries in this Series, the lion share of any transaction for a seller is emotional. This translates in most cases to the relationship between buyer and seller. Is there, or can there be, trust between the principle parties in the transaction? Psychometric testing can help you determine the type of seller who is most likely to trust you or the type of personality that will most likely mesh with your own. Sitting for the tests yourself can help you develop a baseline target to shoot at. Testing a serious seller can help you determine where the pressure points are likely to be during the process and even offer possible solutions to these pressure points.

In his book, Principles, billionaire hedge fund manager Ray Dalio, lauds psychometric testing as a good way to determine if potential employees will fit into the admittedly atypical culture at his firm, Bridgewater Associates. Likewise, it makes a great deal of sense for you to test a seller, especially one who will stay with your firm as a consultant after the sale. We routinely encourage seller-advisors to stay on for some period after the Closing to affect the transition. I can tell you from experience, including recent experience that two owners who are used to being in charge, working in the same office, can easily get on each other’s nerves, especially since there is often a 10-to-30 year age difference between seller and buyer. Lessons learned from these tests can head off these issues. Buyers and sellers are quite often on their best behavior during the courting process, but after the Letter of Intent, (Offer Letter), has been signed, and especially after the Close, the gloves tend to come off. It is not anyone’s fault. It is human nature to begin to let down your guard and become less forgiving. (If you have ever been married, this should make sense to you.) Again, it is hard to trick these tests and the results and understanding of the results can save you and the seller a great deal of trouble, not to say vastly improving the percentage of clients moving their accounts during the transition after the Close.

I am a huge fan of the Directional Insight test, (nsightsuccess.com). We have used it in our work as consultants with buyers, sellers and successor candidates, and also in our own firm with potential and current employees. We have also had good luck with the Winslow Test, (winslowtesting.com). Finally, like a lot of firms, we have used with good results, the Kolbe Test, (www.kolbe.com). Each measure traits in a different way. I recommend you speak to the experts at the various testing firms to determine what you can expect from the test. You want to test yourself and anyone in your firm who will have continuous contact with a seller. You will want to test the seller once you have decided to create a Letter of Intent, but before you deliver it. The key to getting the most out of these tests is to work with someone who is qualified to explain the results. Reading the results is helpful, but someone qualified can help you understand better what the results mean and the relationships of different results by different people. This is why a lot of small to midsized firms will test everyone in a company to see how to improve the workflow and communication. The websites provided above are a good place to find a qualified consultant.  

I cannot begin to tell you how helpful the information revealed in these tests can be for you as a buyer. As a First-Time Buyer, you need all the advantages you can get and this one in my mind can be as important as a valuation on the book of relationships you intend to purchase. The importance of the testing results is magnified exponentially if the seller intends to continue working for any period of time. Some of these tests can cost under $200; an excellent investment if you are looking at buying revenue in the hundreds of thousands or millions of dollars. 

Casey M Corrie

First-Time Buyer Series: Check Your Ego at the Door after the Close

This week, a bonus article on something you should think about early and often. Subtitle this “Give a Little, Gain a Lot.”

Consider the following, reasonably common, situation. You have come to an agreement with the Seller and Closed on the transaction. Now you have begun to effect the transition, along with the Seller’s help. In this situation, as in most acquisitions of investment advisory firms, the success or failure of the deal is directly related to the assets and the number of clients that agree to come to you. You may (should) have a contractual agreement that the Seller will assist you by telling the clients that he or she supports you as his or her successor. However, there are degrees of help.

Once you have an agreement to purchase, it is only natural to begin thinking of the accounts as your own. The Seller does not have any legal standing with the accounts. He or she gave that up when the Definitive Agreement was signed. However, the power in the situation has now moved; not to the Buyer, but to the clients. Who controls the client’s opinions at this point? Not the Buyer. At this early stage of the transition, the Seller still has all the influence with the clients.

The Buyer needs the Seller to be excited about the transition. If you are the Buyer, you need the Seller to be thinking positive thoughts about you throughout the transition process. If there is a lack of enthusiasm, it will negatively affect the transition. All it takes to lose a key client, is for the Seller to be less than enthusiastic when telling the client what a great advisor and person you are. He or she can go through the motions to tell clients to move to you, but if the client senses a lack of zeal by the Seller, your chances of keeping that client reduce exponentially.

I am not suggesting you allow the Seller to push you around, but you cannot let your ego or your inflated sense of control make the Seller feel disrespected. Think about what you say, and how you say it. Keep in mind the following facts:

·        There is a good chance that the Seller is older, if not significantly older, than you are and expects to be treated with respect. Have you ever stepped in front of an older person in the grocery store without saying “Excuse me?” What was his or her reaction? (I am 63, and I too get irritated when an older person thinks I should give them leave, simply because they are much older. However, I have to remember that they are trying to recapture some respect that perhaps they feel they have lost.)

·        Respect what the advisor/Seller has accomplished and act accordingly.

·        If you are an owner, you are used to being in charge; everyone in the office reports to you. Sellers are generally used to the same situation. For each of you, there is an adjustment. The Seller is no longer in charge, but does not work for you. You have to get used to someone in your professional life (possibly in your office) who is not there to take orders from you. Be understanding, and ask for understanding.

·        Finally, keep remembering that this person is going through a very emotional time. Ending your career can be kindred to losing a child or a spouse. Consider having a little empathy; it is in your best interest. Even if you are not empathic, think of your own ROI.

You may have the legal control, but you still need the good graces of the Seller until you are on solid ground with the new clients. Use your head. Don’t cut off your nose to spite your face to prove that you are in charge. Check your ego at the door; at least for a while. What is more important, your ego, or the revenue from a group of million dollar accounts?

Casey M. Corrie

First-Time Buyer Series: The First Meeting

First Published 11/7/17

Congratulations! You have found a potential seller who is willing to talk about selling his or her practice or book to you. You are going to meet in order for the two of you to “take each other’s temperature.” Let’s talk about what you do want to do and what you do not.

Keep in mind that everything that follows is critical, even if you have known the advisor for a decade or more. You are now entering into a different kind of conversation than you have ever had before. In fact, the next paragraph is particularly important if you have known the advisor for some period of time.

In the first few articles in this series, we stressed the importance of being empathetic to the Seller and understanding that for him or her, the impending end of a career can be extremely unsettling. We also focused on the fact that you never want to begin talking about financial arrangements or even deal structure, until you have completed your due diligence on the book of relationships. They all ask, but resist by saying it would not be fair of you to speculate until you have a lot more information. I always say that if I do not have all the data I need, I would have no other choice but to discount the price for risk, but that will not be the case later on in the process. Most sellers appreciate this point of view.

In our view, the first meeting carries the following objectives:

• For you to look like a great buyer to the Seller.

• To take the measure of this person,

o Can you work with him or her?

o Will she be reasonable?

o Is he really open to selling, or just “kicking tires?”

• To find out if the book and the Seller merit spending your time to conduct a due diligence investigation.

For purposes of the first objective, you want to have your Value Proposition ready to articulate, including why you want to buy, why you are ready to buy, and why you over some other buyer. You sharing first is a test to see if the Seller is willing to open up and tell you things you need to know. If he or she is not, that is your first negative sign, and perhaps the only one you should need to rule this one out.

If the Seller is open, you want to ask questions like:

• How did you get started in this business? (People like to tell their story and appreciate the chance).

• Why are you considering selling? As in an earlier article, if the Seller is not specific, worry that he or she will never close.

• How do you manage money?

• What other services do you offer?

• Why do clients come to you?

The questions need to be conversational, rather than delivered in a rapid fire manner. Don’t grill them, simply be interested. Offer something of yourself and then ask about them.

By the end of what should be no more than an hour, you should have a pretty good read on whether more time is merited. Always keep the final objective in mind:

• A transition during which the Seller is enthusiastically introducing you to his or her clients. Anything short of this is not going to be accretive for either one of you.

Be serious, but be friendly. Remember, he or she is sizing you up too. As we have indicated before, it is not a bidding transaction, it is a courting process. Offer to sign a mutual Non-Disclosure to indicate how important their position is. If you can walk away from this meeting with agreement to continue getting to know each other, you are moving in a very positive direction.

Casey M. Corrie

First-Time Buyer Series: How To Find Target Firms

First Published 11/3/17

In the interest of full disclosure, one of the services our consulting firm offers is assistance to advisors in surfacing and bringing to the table appropriate merger and acquisition targets. That said, let us look at the options:

·        Find them yourself

·        Auction sites

·        Recruiters

·        Consultants, like us

You

In my opinion, one of the best ways for an advisor to meet and broach the idea of a merger or acquisition is to do it yourself, if you can make the time. This may be surprising coming from a firm that offers this as a service. Here is something else that may surprise you; it is not about the money. If you read earlier articles in this series, you will find that we believe that these transactions are often 60% emotional for the seller, and only about 40% financial. So it stands to reason that if you can meet a seller under favorable circumstances, you can begin to develop the needed relationship. I am not advocating that you work the deal alone. Since this series is for First-Time Buyers, I have to assume that you have not done this before, and the process is full of land mines and pitfalls that you will undoubtedly encounter. Get help. However, surfacing targets is something you can be very good at if you are willing, and able to put in the time. It takes commitment; you have to market yourself in the same way and with fervor equal to your quest to find clients.

·        Join local organizations and study groups populated by advisors, especially aging advisors.

·        If you are affiliated with a broker dealer, ask about anyone in your area who is getting “long in the tooth.”

·        Offer to be advisors’ continuity plan and even to take an option, (pay a little something), on being the first one to look at their book when they are ready to retire down the road. This does not obligate you to buy, only to be the first one to look at it. First right of refusal in other words.

·        Spend 1-2 hours per week calling local advisors who have been in business 25+ years. Same day and time, week after week. Use the SEC site or BrokerCheck to see how long the firm or advisor has been around. Most broker dealers buy lists of advisors; ask them for a list in your area.

·        Use LinkedIn and Facebook to identify and reach out.

·        Tell every wholesaler that you are looking.

·        When you take on a client, ask who their former advisor was. If he or she is getting older, call them. People often leave advisors because they are slowing down.

Bottom line, it is just like prospecting for clients. Determine your criteria and spend a defined amount of time each week prospecting for a “get to know you meeting.” Be willing to tell anyone who asks what you are looking for; be specific.

Auction Sites

In my view, Auction sites are great for Sellers. They are not great for Buyers. This is not to say you will never find one there. You might. But by their very nature, they are set up to be a bidding process. If you get 5 bidders on your house, do you come down on the price? Are you more flexible on your terms? Of course not. I am not suggesting that you never look at them; I am simply suggesting you be aware of what you are up against. Advisory firms are most often purchased in a process that looks more like courting than bidding. You want to be in on the courting.

Recruiters

Recruiters can be a good way to find targets, especially if your time is limited. They can make hundreds of calls to help you uncover possible targets. However, be careful not to expect too much help beyond finding them. With a few exceptions, recruiters operate to recruit which means gathering basic facts and effecting an introduction. They are not prepared or qualified to help you complete the deal.

Consultants

There are consulting firms that help you work the deal, and others that will actually help you find the targets and then work the deal. Find out what the limits of their abilities are and compare their fees and activities to your other choices.

Casey M. Corrie

As a reminder, these articles are attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. 

First-Time Buyer Series: Your Service Model

First Published 10/24/17

In our October 5th article, “What Are Your Criteria, Part 1,” we talked about your Service Model as it pertains to client size and average revenue. Today I want to drill down on this a little and also bring in the subject of your internal metrics.

Remember, from earlier articles that as a buyer, there are three questions that should top all others when considering an acquisition.

·        How much can I afford? (Or how much can I borrow?)

·        When will I have positive cash flow on the acquisition? (i.e., when will it be profitable?)

·        What is the likelihood that the accounts will transition?

Also from earlier articles you may remember that the Sellers’ concerns revolve around:

·        Will I get a fair price for my business?

·        Will the Buyer be able to pay me, especially if the sale is on installments, over a period of years? (This is particularly true if the sale is an internal sale on a Succession Plan.)

·        Will my clients be treated in a way that would make me comfortable if I see them at the golf course in the future?

The answers to virtually all of these questions can be addressed by your internal structure and your Service Model. Every book or article that you pick up on how to sell your practice, (or any enterprise), indicates that the first order of business is to get your firm on a strong footing. In other words, a seller makes his or her business attractive and more valuable, by making it profitable, with clear metrics to determine how much revenue will be produced, year after year. I would submit that this is just as important for the Buyer.

We all know that there are a lot more buyers than sellers in the market today. Would you rather sell to an advisor who can predict his or her income based on the historical metrics of her firm pertaining to cash flow and average client revenue? How about an advisor who can demonstrate how he or she will be profitable in the future based on defined metrics? As a seller, would that make you feel more comfortable? How about as a buyer; would that not give you more confidence in your modeling of acquisitions at different levels?

Most of us began our careers as advisors focused on bringing on as many new clients and revenue as possible. We then proceeded down one of two roads. Some advisors experienced controlled growth, adding the right kind of clients, and staff to support them, with defined roles according to our needs and the needs of our clients. However, some of us simply became “less small.” These advisors added new staff when the paperwork became too cumbersome, with little or no planning, leading to a “pass the buck” mentality among staff members. These advisors keep filling the funnel with almost any client that will bring in revenue. (Due to this fact, later in their careers, many advisors lament the fact that they have a number of clients that they would rather divest themselves of.) This approach works out until something, anything, happens to slow down the progress of bringing in new business. It becomes more difficult to stay ahead of the expenses. Maybe a product or service they were selling became more difficult to sell. Maybe a prolonged illness. I cannot tell you how many advisors I speak to in a year that tell me that their income went down dramatically because they were ill for 3-4 months and they did not have a contingency plan.

A couple of years ago, I conducted a 2-day class for a group of fee-only RIAs. Each of the 30 advisors produced in excess of $750k in revenue in the previous 12 months. At least one-half of them produced more than $1.5 million. I asked a simple question at the beginning of the session. “How many of you can tell me what your level of profitability was last quarter?” Most advisors in the room looked at me like a deer in the headlights. They knew their revenue level, but not their profit level. This was particularly true when they applied the value of their time. Only one of this group of relatively high producers could tell me. They were not watching the metrics; or at least the right metrics.

The difference between a practice and a business is often nothing more than determining the important metrics of your firm and paying close attention to them. Knowledge of these critical measurements will tell you how you are doing:

·        How you are spending your time.

·        How your staff spends its time.

·        When it is time to hire another staff member.

·        By setting Standards of Performance, metrics will tell you when to hold someone accountable and perhaps when it is time to cut someone loose.

·        The type of client that is accretive to your firm, and those that are wasting your time. (Sans the metrics, you often fool yourself.)

·        How to plan expenses and how to determine which expenses give you the biggest bang for the buck. Example: How many of your clients actually read that newsletter you send out each month? Is the expense in time and money worth the return you get? Perhaps, or perhaps not.

·        Am I ready to create a Succession Plan? Here is a hint, Succession Plans can and should be growth plans.

·        Am I ready to buy? What size is the book of relationships I can handle profitably?

The point here is that if your house is not in good order, and on solid ground, introducing a couple of hundred new clients will not be accretive; it will be distracting. If your firm is solid, you look more attractive to sellers, and also lenders. When you look at acquisition possibilities, you will have a much better idea what you want, what you can afford, and what you will be able to integrate into your firm. You are growing, not just getting “less small.” When you decide to acquire, you move from running a practice to an enterprise. Before you take this step, it is highly recommended that you stary running a business.

Casey M Corrie

First-Time Buyer Series: Your Criteria, Part Three: Merger?

In the past two weeks, we have discussed your criteria regarding the number of clients and the cash flow. Today, we look at your criteria from one element of the acquisition strategy.

There are a number of motives for purchasing a book of relationships. The most obvious ones are to gain additional clients, which in turn increases your revenue. Sometimes advisors decide to merge with future sellers to help scale for the future, while generating immediate income today. This brings up the question: “Are you willing to merge, or do you simply want to buy?”

Our buyer/clients often tell us that if an aging advisor wanted to join the firm for purposes of a succession plan down the road, this would be an acceptable arrangement. The seller is given a formula to apply, with which he/she will be able to determine when it is time to retire. Sounds like a great arrangement; the buyer gets what amounts to an override on business, and can claim additional AUM; the future seller has a guaranteed succession plan and can calculate the sale price. This can be an accretive strategy, but you certainly need to think about the unintended consequences of such an arrangement and set some “deal killer” criteria. Here are a few issues to consider:

• Does the merger partner, (MP), fit with our firm’s culture? Share our values? The wrong person can be very disruptive to a firm’s internal flow.

• How will our staff, clients, respond to the MP?

• Will the MP’s book of relationships fit into our long-term strategy for growth, or will the book cause us to change our service model? (Average client size for example.)

• Can we profitably service the MP’s book if he/she were to retire today?

• Does the MP share our investment philosophy?

• Where are the MP’s clients located?

There are hundreds of additional issues to consider. Keep in mind that this advisor (MP) may be someone who has run his/her firm for decades, his/her way. If he/she joins your firm, or comes “under your wing,” how will he/she respond to this? If you are a progressive firm that embraces technology, does he/she?

The above statements are not mentioned to discourage you from offering this as an option. The idea is to encourage you to give a lot of thought to what kind of arrangement you are willing to accept, and under what circumstances. You can save yourself and potential merger partners a great deal of time by not trying to fit a “square peg in a round hole.” You want to offer a certain amount of flexibility, but know what your deal killers are. Successful money managers, as well as successful real estate investors, and successful M & A practitioners all share at least one trait. They know when to say “No” and they do so long before they spend a lot of their precious time on something that will never work. In his book, Am I Being Too Subtle? Billionaire real estate investor Sam Zell says that he learned very early on that he could not see how real estate developers made money. He decided that at least 50% of the payoff was vanity, (he phrased it a lot more colorfully, but my Mom may read this). You have to decide early what your go/no-go’s are.

As we suggested in the last article, model situations to determine how you would judge the results. Work the numbers, but also think about the culture of your firm, your service model, and the parts of your business that you are willing to bend on, versus those that you are not. The merger strategy can be a great way to help build the AUM and revenue of your enterprise, but it comes with challenges. The more thought given to the consequences, the better you are prepared when an opportunity arises. Advisors like to work with colleagues who are prepared.

Casey M Corrie

First-Time Buyer Series: Your Criteria, Part Two: Cash Flow

As a continuation of last week, we are here again as we hope to shed some light and help those of you out there that are First-Time Buyers.

In last week’s post, we discussed general criteria for an acquisition, with a focus on how many additional clients an advisor can service. Today, we look at criteria from the perspective of cash flow.

As a buyer, there are three questions that should top all other financial considerations when considering an acquisition.

• How much can I afford? (Or how much can I borrow?)

• When will I have positive cash flow on the acquisition?

• What is the likelihood that the accounts will transition?

The first and second questions are directly tied to cash flow. Here is a rule of thumb formula that should help. First, some definitions:

• Current Expenses and Revenue: The buyer’s expenses and revenue.

• New Expenses and Revenue: The seller’s expenses, (that will be assumed by the buyer) and revenue.

• EBOC- (Earnings Before Owner’s Compensation): The buyer’s comp after the acquisition.

The formula:

• Current Expenses + Current Revenue minus Current and New Expenses = EBOC minus Buyer’s comp = Net Operating Income

• Now subtract any debt service and you can see when, if ever, you will be in the black.

These are just the basics. How you apply them to a book of relationships or a practice is dependent on a number of other factors, but if you have a few basics down, it can greatly increase your ability to acquire, what you are capable of acquiring or tell you that you are not ready to acquire.

For any criteria you set, you should model it. Determine how you intend to finance the acquisition and model the down payment, the payment plan, debt service, how you will service the added book of relationships and how much this servicing will cost you. It is like getting pre-approved for a mortgage to purchase a house. You determine what you can handle before you commence your search. Model books and practices of several different sizes to determine how soon you will become profitable in each instance. If you cannot calculate it yourself, find someone who can help you. This could be an accountant, or an M & A consultant, or even another advisor who has acquired before. You do not want to waste time engaging in serious discussions with sellers without a very good idea what you can make work on your end. Your research and forethought will differentiate you from other buyers and position you as a more attractive suitor in the eyes of the seller. It will also save you and anyone you engage to help and guide you a great deal of time and ultimately, money. In this case, knowledge really is power; buying power.

Casey M Corrie

First-Time Buyer Series: What Are Your Criteria, Part 1?

In last week’s article, Rookie Mistakes, #2, we discussed developing your Value Proposition to sellers. Today, we consider your criteria for an acquisition.

When determining your criteria for an acquisition, there are a number of considerations, such as level of average client assets, investment style of the seller, and of course, location of the majority of the clients. In our view, the two most important issues to consider are how you will service the new clients, and how you will cash flow the acquisition.

Most coaching programs suggest that you are ready to purchase a group of client relationships when you produce an income stream sufficient for your needs and deliver your clients great service. This is good advice, because in order to establish your criteria for an acquisition, it is critical to have a comprehensive plan in advance as to how you will service all these new clients. It is one thing to slowly build your systems and processes to deliver a great experience to clients when you are doing it one client at a time. It is something entirely different to impose a new system on say 100 to 200 new clients all at once. If you cannot deliver a consistently high level of service to new clients, while maintaining that level for your existing clients, you defeat the purpose, (and the ROI), of the acquisition. When you are setting your criteria for the acquisition, your top priority should be addressing this issue.

Quite often, advisors come to us and quote their criteria in terms of assets, with little or no real thought given to how many clients they can actually service. In truth, assets are generally easier to scale than clients, (depending of course on your investment style). The issue you should really be addressing is your current service model. Does your pricing model fit the level of service you are giving? Do you give the client who pays $2,500 a year the same service that you give the client who pays $10,000? Most advisors that we ask that question, answer it with a resounding, “Of course not!” However, when we start looking at how many hours they spend working with their clients with $250k versus $1 million, it is often dangerously close.

Ask yourself what your ultimate objective is in buying. I assure you that while it can pay off, it is not an easy process. It also will take a great deal of work to integrate a sizable group of clients into your practice. Buying a “book” or a group of client relationships is usually an attempt to make a significant escalation in the assets you manage and/or the number of clients you service. In short, to scale. We recommend that you put as much thought into how you will service those clients as you do to whether the transaction can be cash flowed.

As you no doubt know, there are a lot more buyers than sellers. Sellers are a great deal more interested is talking with buyers who ‘have their stuff together.’ The knowledge that you are confident in your ability to add a large number of clients, and how the addition will be both accretive and profitable is a powerful statement to make to a seller.

Stay engaged next week for Part 2! Next week, we will discuss the need to model your cash flow strategy long before identifying an acquisition target.

As always these articles are here to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. If you have any thoughts or questions, or would like to dive deeper into each article, please reach out too me here or via Facebook. I am here to listen and ultimately help you through your specific process. 

Casey M Corrie

First-Time Buyer Series: Why Sell to You?

In last week’s post, Rookie Mistakes, #2, we discussed an example of how negotiating before you have all the facts can cost the advisor a lot of money, if not the entire acquisition. Today we consider why a Seller would pick you over other buyers.

Statistics vary, but some surveys indicate that there are as many as 50 buyers to every seller in certain market areas. Whatever the numbers are, it is clear that there are a lot more buyers than sellers. This creates an environment in which it is critical that you as a buyer demonstrate to a prospective seller that you are the person or group to answer three critical questions for any seller:

·        Will this buyer give me a reasonable price for my book of relationships?

·        Does he/she have the financial wherewithal to pay me?

·        Will I be proud to go to my clients, who are in many cases good friends or family, and tell them that this is the person I have chosen to take over the stewardship of their accounts?

On a basic level, if the prospective seller cannot be convinced to be comfortable with the answers to all of these questions, you will not have a legitimate shot at working something out.

Advisory firms are generally not purchased through a bidding process. It is more of a courting process. In many cases, the money is less important than the third question above. The clients of any seller are often longtime friends and even family. If you cannot build trust with the seller, he/she will never Close. In his book, The Speed of Trust, Stephen M.R. Covey talks about trust as being both veracity and competency. It takes both and you have to convince the seller that you are trustworthy.

The entire buying process is devoted to answering these questions, but it starts with the Value Proposition, (VP). You must build a VP that tells the seller why he/she should sell to you. The VP is a combination of your VP to clients plus elements to instill confidence in your stability and your ability to service clients in the manner that they have become accustomed. Your VP should support an acquisition that attracts your ideal acquisition. If you have 80 clients with $80 million under management, it is unlikely a seller will believe you have the infrastructure and resources to service 500 additional clients.

To develop the VP, be able to articulate:

·        How you will pay for the transaction

·        How the seller will get paid if you become disabled or die

·        How you and your team will be able to service significantly more clients

·        The background and qualifications of the key players in your firm

·        Your firm’s infrastructure

·        Your firm’s culture

·        Your firm’s technology and how you use it to service clients

·        The services you provide

·        Your investment philosophy

·        If you are managing assets in-house, your investment track record

·        Your continuity plan, in case something happens to you, (disability, death)

·        What makes your firm and you special?

Be sure that anyone who will have contact with potential sellers, be it members of your firm, or an outside consultant, has the elements of your VP down and can articulate them effectively. (By the way, your firm should have one point-person who coordinates all activities connected with a possible seller. More than one can often confuse a seller, and cause the seller to believe you are a dysfunctional group.)

You will be asking the seller to “open the kimono,” so that you can perform due diligence. You must be willing to do the same.

Be prepared to be diligent in your investigations, (discussed in a future post), but never forget that this, on a basic level will be a popularity contest. You are looking at this possible acquisition, but you are also auditioning. At the end of the day, it will often come down to whether the seller likes you more than another buyer.

Suppose there are two Chevrolet dealerships in your town and each wants the same amount of money for the car you want to buy. Who do you pick? Be that person for your seller.

As always, these articles are here to help First-Time Buyers on their path to buying books as well as helping sellers navigate a critical time in their life and career. If you have any questions, comments, or would like to dive into these topics in detail, feel free to email me here or find us on Facebook at www.facebook.com/casey.corrie. Until next week!

First-Time Buyer Series: Rookie Mistakes That Can Cost You Big, # 2

In last week’s article, Rookie Mistakes, #1, we discussed one example of how negotiating before you have all the facts can cost the advisor a lot of money, if not the entire acquisition. Continuing in that vein, we will highlight another situation we have encountered that can cost the First-Time Buyer a great deal of money.

An excellent advisor we know, once suggested that he might pay 70% down at an early meeting, prior to the completion of the due diligence. After he completed his due diligence, he decided that he might pay 100% down, but he of course wanted a discount for paying it all up front. After all, he had all the risk in the transition. The typical discount for a book when paying it all at Closing can be 25%-35%. What do you think the seller said? You guessed it, “Why should I discount it 30% when you have already offered me 70% upfront?” On a $1.5 million practice price, it cost the buyer as much as $450,000. And you thought $5 for a coffee was expensive.

We are not suggesting avoiding the informal first meeting. By all means, use these meetings to get to know the seller, and to investigate or develop common ground. However, do not take any meeting with a potential seller lightly. Just because it is coffee, drinks, or golf, does not mean you do not prepare. Preparation means knowing what you want to find out, but also what you want to say, or not say. In these early meetings, you are investigating, but you are also auditioning as an attractive buyer. The seller is deciding if she wants her clients exposed to you. If you start outlining ideas off the cuff, she might wonder if you would do that with her clients. That is bad enough. Worse still is the fact that she is likely to remember those things that you say that seem the most beneficial financially. It is hard to get the water back in the garden hose.

In your early discussions, stay away from financial arrangements. For one thing, it sends the message that numbers are all you care about. A “get to know you” meeting is simply to see if you can explore working together. This is the meeting where you decide, and the seller decides, if a sharing of data even makes sense. Why is she selling? What will she do after she sells? (Here is a tip; if she cannot articulate what her post-sale plans are, you might want to be a little suspicious that she will never actually complete the sale. “Travel” is not a very good answer. “I am learning Italian, as I am planning an extended trip to Lake Como in Italy next August,” is a much better answer. It is more definitive.)

Plato said, “Wise men speak because they have something to say; fools because they have to say something.” Do not let your desire to say something cost you the negotiation before it begins.

Stay tuned for next weeks article, and once again, if you have any questions, remarks, or would like to see how we can help, feel free to message me here or on Moisson Partner's facebook page.

First-Time Buyers Series: Rookie Mistakes That Can Cost You Big #1

In last week’s article, “The Empathetic Buyer,” we discussed how an advisor-buyer can literally kill a deal by not being sensitive to and respectful of the emotional issues that a seller is experiencing. Today, we will look at a rookie mistake that we have seen in our consulting practice, made by some very intelligent advisors before they ever get the chance to negotiate. These mistakes can cost the advisor thousands, if not hundreds of thousands of dollars.

Suppose you meet a married couple at a gathering and learn they have substantial investable assets, but that is all you learn. You invite the couple for coffee the next day and as soon as you sit down one of them asks, “So what should I do with my investments?” Do you dive in and proceed to tell them how you would allocate their assets, or do you begin asking pertinent questions to get a clear picture before you start making suggestions? The answer is obvious, right?

Now picture this alarmingly common occurrence. An advisor-buyer sits down with an aging advisor who has indicated that she is interested in selling her practice. Without any substantive information about the practice or the clients in their book of relationships, the advisor begins outlining on the back of a napkin, how he might structure the deal. He might even talk about how much money he would put down at the Closing. When you read it this way, it sounds imprudent at the very least. We have observed very bright, successful advisors do just this in an effort to establish a relationship with the seller, or to try to get their attention. Here is a clue, if the advisor tries to take that napkin with her, don’t let her take it! As far as she is concerned, you just made your first offer!

I know, the advisor was just trying to find common ground and he was thinking out loud. It is easy to fall into this trap. You are having a friendly first meeting and you are getting along. Speculating on structure based on what you are hearing seems like a good way to advance the conversation. The advisor figures that he will complete his due diligence and then see if what he initially suggested makes sense. Too late! If what he said sounded good to the seller, anything short of that will be disappointing. If what he outlined does not sound good, he has just blown his first impression. He loses either way.

The seller would have a great deal more respect for a potential buyer who indicated that he had to complete his due diligence before he started making offers. He could talk about the different ways that practices are purchased, but the minute he commits one to paper, even a napkin, he is headed down the road to ruin. If he wants to make a good impression, he should ask a lot of questions and start talking about her practice and why she is considering selling. He could even talk about his own practice and why he feels he is ready to buy and service additional client relationships. Speculative ideas are equally unfair to the seller and the buyer.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week. Next, Rookie Mistakes That Can Cost You Big, # 2

First-Time Buyer Series: The Empathetic Buyer

Virtually every article one reads about practice management focuses on avoiding your services to clients becoming a commodity. With the advent of robo-advisors and the increasing popularity of passive investment strategies, advisors are told to develop Value Propositions to make their services to clients about more than the numbers. Then when an advisor wants to sell his/her practice, the buyer determines the value of the book on some multiple of revenue, based on whether it is transactional or recurring. There is little credit given to the intangibles of an advisor’s practice.

It is a paradox to what the advisor has heard over the last decade or more.

For buyers, an acquisition is almost entirely a financial transaction, as it should be. As a consulting firm, often helping advisors acquire, we focus on cash flow and the likely percentage of transition of clients and assets, more than on the value-added characteristics.

For most sellers, the sale represents the culmination of their life’s work, the handing over of their clients and friends to another steward, and a change in their life from trusted advisor, to former trusted advisor. The very state of mind that makes an entrepreneur successful; a desire to control their destiny and build something based on their vision and belief system, vanishes with one stroke of the pen. For the advisor with little or no future plans for retirement, this can be both depressing and downright frightening. By the way, “my spouse wants to travel,” does not pack the positive punch it takes to mitigate these feelings.

This dynamic sets up a situation in which an advisor-buyer who is not willing to be sympathetic with what the seller is experiencing can easily say the wrong thing at any point along the process. It is not necessarily the buyer’s fault. This is especially true of a first-time buyer. He or she is so focused on getting the numbers right that the feelings of the seller seem to be less consequential to the process. The assumption, often incorrect, is that the seller would not have entered a negotiation if these emotions had not been dealt with.

In our experience, the most sensitive and dangerous period in the entire acquisition process, is that between the signing of the nonbinding Letter of Intent, (offer letter), and the Closing Date. Once the seller accepts in principle the terms of the LOI, the sale becomes very real for him or her. The emotions discussed above are multiplied exponentially and the likelihood of second guessing, and other forms of “seller’s regret,” rise with it. Do you remember when you were a child on a long car trip and just looking at your brother or sister wrong could start a fight? It only takes one statement to a sensitive seller during this period to cause a breakdown in communication, and even trust between buyer and seller. Think, “walking on eggshells.”

In a competitive seller’s market, such as exists today, it is important to be an attractive buyer. Paying attention to the seller’s feelings is just as important as the numbers. Some studies indicate that for most sellers, the transaction is 60%-70% emotional, and only 30%-40% financial. The more you are perceived to understand the seller’s emotions, (or at least that you are attempting to understand), the more attractive you become as a buyer.

This all may sound like common sense. One should be sensitive to the feelings of the person you are negotiating with. We have seen buyers spend hours working and reworking the numbers, meeting with bankers, only to blow the deal by making the seller feel as though he or she is less important than the numbers. A rookie mistake. Bottom line, if you are purely a numbers person, find someone on your team or an outside consultant, who can stand between you and the seller to make sure you are being duly sensitive to what they have accomplished and the emotions that the seller is almost definitely experiencing. A first-time buyer can make a lot of mistakes. This one is to be avoided at all costs. It can literally be the difference between success and failure.

The Year of the Fiduciary Rule

by Fred Reish

Posted on January 7, 2016, by Fred Reish in Broker-Dealers, DOL Activity, fiduciary, Registered Investment Advisers, RIA. Comments Off on The Year of the Fiduciary Rule

2016 promises to be the year of the fiduciary . . . the fiduciary rule, that is.

It now seems certain that we will have a final fiduciary rule in effect by the end of 2016.

What will that mean? It will re-write the rules for investment advice and sales to retirement plans and IRAs. The impact will vary, depending upon whether the person making the recommendation is an RIA, a broker-dealer, or an insurance agent or broker.

For example, for RIAs, the greatest impact will be on investment advisers who recommend retirement plan distributions and rollovers and those who receive additional fees (for example, 12b-1 fees) from their IRA investors. On the other hand, advisers of broker-dealers will need to make significant changes in disclosures and compensation practices across the board (that is, for recommendations to plans and IRAs, and recommendations about distributions and rollovers).

Interestingly, the impact on retirement plan sales and advice may be less than is commonly expected. However, the impact on advice and sales to IRAs will be nothing short of revolutionary. Similarly, the “capturing” of IRA rollovers, through recommendations to participants to take distributions, will be dramatically affected.

One more comment: Much of the attention has been focused on the prohibited transaction exemptions, and particularly the Best Interest Contract Exemption (BICE). However, in my opinion, there has not been enough attention given to the fiduciary standard of care. For example, if an insurance agent recommends an annuity contract, both the financial stability of the insurance company and the provisions of the annuity contract need to be evaluated and a prudence determination must be made. I haven’t seen much said about that. Similarly, the recommendation of mutual funds to IRAs would need to take into account issues such as the quality of the investment management, the prudence of the amount allocated to that asset class or investment category, the reasonableness of the expense ratios, and so on. I think that, once these consequences are fully appreciated, the nature of investment and insurance advice given to IRAs will be materially changed.

That’s it for now. There will be much more in the future.

DOL Fiduciary Rule, Tax Extenders Hang in Balance as Spending Bill Deadline Looms

By Melanie WaddellWashington Bureau ChiefInvestment Advisor Magazine@thinkadv_career

This week is the ‘most crucial’ for Washington this year as a trifecta of events converge, says investment strategist Greg Valliere

With Congress agreeing to fund the government for another five days, which pushed the deadline to work on a longer-term appropriations bill to Wednesday, lawmakers are “furiously negotiating” the major hurdle of what policy riders to include, says political analyst Andy Friedman of The Washington Update.

Both parties “are keeping the negotiations very close to the vest,” Friedman told ThinkAdvisor on Monday. As to whether a rider will be attached requiring the Department of Labor to put its rule to amend the definition of fiduciary on retirement accounts through another comment period, Friedman says that he believes “that if the Democrats agree to the rider, it must be with White House permission. That suggests Obama would not veto the legislation over that issue.”

White House Press Secretary Josh Earnest said during his Dec. 8 press briefing that the administration will “aggressively oppose any effort by Republicans to water down” the DOL’s rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.

Indeed, Greg Valliere, chief investment strategist for Horizon Investments, calls this week the “most crucial” this year, noting the trifecta of a spending bill, the Federal Reserve decision on interest rates, and the Republican debate.  

Considering the “fragility in the commodity and junk bond markets,” Valliere says, “some Fed officials may have second thoughts about hiking the [federal] funds rate on Wednesday, but the die has been cast, there's no turning back.”

Valliere predicts that the Federal Open Market Committee’s statement on Wednesday will be “exceptionally dovish, with no commitment to a March move and a clear signal that the Fed will raise rates very deliberately in 2016.”

A positive sign that an omnibus spending bill will indeed be wrapped up by the Wednesday deadline (or a couple of days later) is the fact that House Speaker Paul Ryan had dinner with Minority Leader Nancy Pelosi on Friday evening, Valliere notes.

“Some deals look likely — allowing exports of U.S. oil, changing some Obamacare provisions, etc. — but there's growing uneasiness in both parties over a massive package of tax ‘extenders’ that could cost nearly $800 billion over 10 years. A shorter time frame is possible for the extenders,” Valliere says.

“Tangled up” in the omnibus appropriations bill is the “need-to-pass” tax extenders legislation, Friedman adds, which reinstates tax code provisions that expired last year. 

Many of these provisions, he says, “benefit businesses through items such as enhanced depreciation deductions. Also included is the IRA/charitable contribution provision for individuals over age 70-1/2.”

The hope, Friedman adds, “is to make these provisions effective retroactively for 2015 and through 2016 (although some negotiators would prefer to make some of the provisions permanent).”

Congress was also said Monday to have tied the final version of the bill, the Cybersecurity Information Sharing Act, now known as the Cybersecurity Act of 2015, to the must-pass omnibus spending bill.