Continuing with the theme I’ve covered previously of interviewing professionals experienced in succession planning, I recently spoke with Ian Kutner. Now retired after having sold his financial planning practice to a San Diego wealth management firm, Ian shared some interesting details about how his transaction unfolded.
Working within an acquiring wealth management firm
Following a succession plan agreed to at the outset, Ian initially worked full-time with the firm that was acquiring his book of business. This involved an initial 40 hours per week commitment that deceased to 30 hours once the initial phase of the integration was completed.
Keep in mind that while Ian spent 18 months transitioning his clients over to the new firm, he was not directly compensated for his time. Rather, his commitment was factored into the down payment he received when the deal was struck.
Payment structure for selling a financial planning practice
According to Ian, the sale price for his book of business was set based on guidance from FP Transitions, an equity, succession, and acquisition management firm specializing in the financial services industry. The sale terms were structured as follows:
- 30% down payment
- Seller-financed note spread out over five years
- Interest-only payments on the note during the first year
The agreement also included a caveat related to client retention. If, for example, retention rates for what had been Ian’s clients dropped by 10%, the value of the note would be adjusted downward. Fortunately, this proved to be a non-issue: in the end, the retention rate was 99.7%.
Deciding on a Buyer
Striking a reasonable deal is about more than the financial terms, however. Choosing the right counterparty is also critical. To better understand what this means, I’m going to run through how Ian came to decide on the firm he eventually sold his practice to.
For younger advisors in particular – including yours truly – who are looking to acquire a book of business, figuring out what those who are retiring are looking for, and what their challenges are, can boost the odds of success.
In Ian’s case, two factors played a key role in his decision to sell his book of business and retire:
- Declining popularity of the commission service model. As Ian saw it, the fee-based model was the industry’s future, but he believed it would be difficult for him to move away from his longstanding reliance on commissioned sales. He was unsure about whether he could make the switch-over to the fee-based model and doubted whether he could remain competitive using his traditional approach in a rapidly changing marketplace.
- Changing technology. Another issue for Ian was the fact that his preferred software technology was becoming less accessible, largely because of price increases and a decline in ongoing support and development. He believed the process of selecting and integrating new technology into his practice would be challenging, to say the least.
Having decided to exit, Ian believed that it was important to identify an advisory firm that was in a good position to benefit from the way the industry was changing, including the shift toward a fee-based approach. He wanted to strike a deal with a successor firm that was not only capable of addressing the various challenges, but could help ensure the sales transaction went as smoothly as possible.
Luckily for Ian, this didn’t mean he had to begin a search from scratch or sift through a list of unknown entities in what could prove to be a time-consuming and painful due diligence process. Years before he decided to put his succession plan into motion, Ian was already well familiar with his soon-to-be successor.
For one thing, Ian’s firm and that of his successor were affiliated with the same broker/dealer, Sagepoint. He had also run into the head of the other firm on several occasions at local (San Diego) Financial Planning Association chapter meetings. In fact, Ian had known that advisor for about a year before any succession planning conversations took place.
Aside from actually knowing the person he would be trying to do a deal with, Ian was keen on the potential acquirer for other reasons, including a technology-savvy approach, which Ian viewed as essential in the current environment.
The fact that the head of the firm he was considering selling his book of business to was relatively young but relatively experienced was also a plus, since Ian felt that selling to an older advisor might create other risks. These including being faced with the prospect that such a firm might seek to exit the business before Ian’s deal was fully consummated.
Leveraging expertise during the succession planning process
But having a potential acquirer in the wings isn’t the only thing that supported Ian in his efforts to ensure a smooth transition. Both he, as noted earlier, and the acquiring practice leaned on FP Transitions to facilitate the succession. FPT not only helped come up with at a mutually agreeable sales price – aided by intensive data-gathering – they also provided a sales template that served to ensure the various bases were covered.
Admittedly, the boilerplate sales contract FP Transitions provided required substantial tweaking by an outside attorney to make it fit the particulars of Ian’s (not-so) unique succession plan. Although this was strenuous and required plenty of time on Ian’s part, there was a lot to be said for the fact that negotiating the sales price was not, as is possible, the contentious issue.
For advisors looking to buy a financial planning practice
If there is one simple takeaway from my interviews with Ian and John Turner of Live Oak Bank, it’s that advisors like you (and me) who are looking to grow our practices and ensure our longer-term viability need to get out there and make the necessary connections. This means letting people know who we are and what we are up to.
Quite simply, we need to tell them straight: we are looking to buy a book of business from a retiring advisor.