As an increasing number of senior financial advisors prepare to retire, more books of business may be offered for sale. But before you rush out and begin negotiating the purchase of a roster of clients, consider whether your business is in the ideal position to take such a drastic step.
The health of your practice is of critical importance. Are you already profitable and serving your current clients well? Can you handle the effort and resources it will take to retain more clients? Have you overestimated the immediate benefits of acquiring them?
Book acquisition deals fail when the acquiring advisors don’t do their homework or they don’t seek the right fit, says Jerry Butler, president of Queenston Group in Winnipeg.
If the acquisition doesn’t pan out and clients leave your practice, the costs could be high, both in terms of your reputation and in financial losses.
So, take time to reflect on your motivations for purchasing a book of clients. Making such a purchase for the wrong reasons can doom the deal from the start.
Here are three of the worst reasons for buying a book of business:
1. You want to pursue a new niche market
The book you buy should complement your existing client base. It should not be a route to taking your practice in a dramatically different direction. You can’t buy your way into an unfamiliar niche market without understanding its needs and motivations.
“It’s very important for the buyer and seller to know who’s going to be the best fit to deal with clients,” says Butler. You have to factor in the demographics or profession of the book’s average client.
As much as possible, try to pursue a new set of clients that is compatible with you and your business.
2. You are trying to salvage a floundering practice
If your practice has taken a beating from the market and departing clients, buying a book isn’t going to save it.
Client acquisitions won’t help you “dodge the markets” or “outrun volatility,” says Evan Thompson, business coach and founder of Evan Thompson and Associates in Toronto.
Don’t expect the benefits of an acquisition to materialize quickly. There will be a period during which you will have to focus on nurturing those new client relationships before business actually stabilizes.
“Many advisors think buying a book is a [gift] from heaven,” says Butler. “[That] it’ll solve all their problems. While it can increase the value of your business, you can’t sit back and expect the money to roll in.”
3. You want more clients, period.
Purchasing a book isn’t a shortcut to big profits, especially if your business is in its infancy and you have only a few clients, Butler says. Your personal income won’t necessarily spike with a sudden increase in the number clients you serve.
“Chances are that in the first two to three years, you’re not really making money,” says Butler. That’s because you might not have enough capital yet to pay off the cost of the acquisition at a manageable pace.
This is the second part in a two-part series on buying a book of business.
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