Due diligence on prospective buyers of your practice is a crucial part of the succession-planning process, said Robert Reid, director of London-based Principal Syndaxi Chartered Financial Planners U.K., in a speech at the Canadian Institute of Financial Planners' (CIFPs) annual conference in Orlando on Thursday. Carefully examining buyers of your book will help you ensure that your clients and staff will be taken care of, and that you will be compensated properly for the sale.
That process must begin with a frank conversation with your staff as to whether a team member would be interested in buying the practice, according to Reid, who spoke about common succession-planning pitfalls.
Financial advisors tend to assume that a younger financial advisor on the team will want to step up and take over, he said, but that is not necessarily the case.
"I have met some really great young planners over the past few years who have been very adept at tax and technical planning," he said, "but they don't want to buy a business."
Another key element of proper succession planning is having a lengthy discussion that take place over an extended period, said Reid: "There is no point in, five minutes before you retire, saying, ‘How do you fancy buying a practice?' You have to give people a chance to think."
If you are looking for a buyer outside of your practice, consider his or her motivations in buying your book. You must understand whether the buyer sees a good service model that would fit with his or her own business, or that individual simply sees growth in assets under management, Reid said.
"Knowing what they're trying to do [with your business] and seeing if you're confortable with it is absolutely vital," he said.
Advisors should also learn about potential buyers' businesses and the services they intend to provide to your clients. One question to consider, Reid said, is whether your clients will end up paying more for less service.
Another key element of the transaction is how the buyer intends to pay for your book of business. Understanding this detail will help you avoid one of the biggest mistakes made in succession planning: allowing the buyer to use profits from the acquired practice to pay for the purchase.
That revenue belongs to the selling advisor, not the acquiring one, Reid said.
Another red flag to watch out for is a buyer who talks about "synergies," said Reid: " ‘Synergies' is a very posh way of saying they're going to cut your costs and your staff."
Understanding how your staff will fare in the acquisition is important. Retaining staff will be an integral part of the deal because clients will be reassured if familiar team members remain after you leave the practice.
The selling advisor is not the only one who will want to do some research. Remember that your buyer will also want to learn more about you.
"If you have a very good brochure on your business [explaining] why it's valuable, with some metrics," Reid said, "you will save yourself so much time."
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