Selling your practice? Here are the top five things to look for in a buyer

Can you imagine dedicating the better part of your working life to building a successful independent financial advisory practice only to sell it to a buyer who proves to be a total mismatch and proceeds to run your business straight into the ground?
Unfortunately, this scenario is not uncommon, a point underscored on a personal level when I met with an old industry friend who had recently sold his own independent practice. In my friend’s case, he asked the buyer — just when signatures finalizing the sale had been inked — about when the buyer planned on meeting in person with his newly acquired clients.
The response?
“Oh, I never meet with clients. I’m just not good with them in person.” Suffice it to say, things rapidly went downhill from there.
In this case, the majority of the selling adviser’s clients, feeling underserved by the buying adviser, began to leave in a wave of dissatisfaction. The selling adviser’s three former employees, who had loyally served the practice for many years, were eventually let go by the purchaser. And because a significant portion of financial proceeds from the sale of an advisory practice is almost always based on post-transaction earn-out revenues, the selling adviser also lost financially.
Even worse, there were multiple negative social and emotional consequences. Because — as is often the case — the selling adviser’s largest and most loyal clients were also personal contacts, he would routinely encounter former clients who felt personally let down by him in various social and community settings. At the same time, he was consumed by feelings of guilt over his former employees, and a sense of regret over what was, essentially, the destruction of his business legacy.
How could something like this happen? Too many advisers fail to take into account the fact that the buyer who may be willing to pay the most financially — at least on paper — may not always be the best fit with the practice’s clients, its service model and employees.
The solution is for selling advisers to approach any transaction from a holistic, long-term value framework. That means looking beyond the transaction price to ensure that any potential transaction partner meets the following five key criteria:
1) Does the prospective buyer fit with my clients from a service model and strategic focus standpoint? First and foremost, it’s important for the seller of a practice to do a deep dive very early on during the due diligence process to understand how the prospective buyer typically serves clients, with a particular emphasis on his or her preferred forms of and frequency of communication and in-person interactions. Above all, it is imperative to ensure that the prospective buyer is in strong alignment with how your clients prefer to communicate and interact.
Equally important, be sure to gain a true understanding of the client demographic that your prospective buyer serves to ensure that your practice’s clients either fit in the same demographic, or are in an adjacent area that the prospective buyer could easily serve.
For example, if the majority of your clients are Gen Y mass affluent investors and the majority of the prospective buyer’s clients are late stage baby boomers who are high net worth retirees or pre-retirees, the transaction may not be a good fit as the buyer may ultimately have a limited ability to support your clients adequately. On the other hand, if both of your client bases are in different age demographics, but in the same economic strata, this may be a strong “adjacency area” that your prospective buyer is well positioned to expand towards.
2) Does the prospective buyer fit with my employees from a cultural standpoint? The majority of successful independent advisers have built their businesses on a scalable basis by relying on trusted and long-tenured employees who have a strong understanding of the clients and know how they can best be served.
Before undertaking any sale of your practice, make sure that the buyer is given a full understanding of each employee’s role in your practice and the client relationships for which the employee is responsible. Leaving aside any sense of moral obligation you may have to your employees, chances are good that the team that helped build your practice will be essential to the continued future health of the business.
3) Does the prospective buyer have an established track record of building and growing his or her own client relationships already? It’s essential for a selling adviser to verify that the prospective buyer has a proven ability to establish, maintain and nurture client relationships. How many years has the prospective buyer been in business? Did the prospective buyer establish his or her own independent practice, or was it inherited or transitioned in whole?
Just as an attorney or a doctor wouldn’t transition their practice to an inexperienced professional the independent adviser should think about how well-served clients will be on the basis of their prospective buyer’s proven experience levels.
4) Does the prospective buyer have any track record of success with acquiring and integrating other advisory practices? Along the same lines, verifying that a prospective buyer has some proven success in acquiring and integrating other practices is a must when determining whether the transaction will be a success over the long term. While it’s important to have the ability to build and nurture client relationships, the purchase of an entirely separate practice can be a complicated event that experience better prepares you to manage effectively.
5) Does the prospective buyer have a comprehensive business plan for the next three to five years that accommodates the successful integration of my practice into his or her firm? Perhaps the single most important criteria for any selling adviser is to ask the prospective buyer what his or her three- to five-year business plan is, and how this transaction fits within that plan. The most effective means for being able to discern whether a prospective buyer will be successful with the addition of your practice is to ensure that he or she has a detailed roadmap.
The overwhelming majority of independent advisers have chosen to run their own businesses because they care about far more than just up-front money as legacy, trust and relationships all play critical roles in the lives of independent advisors.
When it comes time to exit the profession through a planned sale of their practices, independent advisers should ensure that the transaction reflects all of these factors as well.
Kevin Keefe is president and CEO of First Allied Securities Inc., an independent broker-dealer that is part of Cetera Financial Group.