Book Sale

Do you find yourself daydreaming about spending the day golfing, walking along the ocean or traveling to Europe on a whim? Such mental wanderings are an indication that it may be time for you to ride off into the sunset after years of hard work. But what are you going to do with your book? You're not just going to hand it over to the firm or to another broker. After all, you've built equity in your

Do you find yourself daydreaming about spending the day golfing, walking along the ocean or traveling to Europe on a whim? Such mental wanderings are an indication that it may be time for you to ride off into the sunset after years of hard work. But what are you going to do with your book? You're not just going to hand it over to the firm or to another broker. After all, you've built equity in your business.

Before you begin the business-selling process, you should know it's not an overnight transaction. It generally takes three to five years, according to Mitch Vigeveno, head of Turning Point in Clearwater, Fla., a recruiter and consultant to financial firms. "It takes two years to get the financials in order. It takes a year to find a buyer, and it takes a year to transition clients."

What Are the Options?A wirehouse rep can cut a private deal with another broker or participate in the firm's business transition plan--if there is one (see "Firms' Transition Plans Vary Widely," Page 60). A third option is to groom an employee to take over the book. A fourth option is to go independent.

Rick Peterson, a recruiter based in Houston, says another alternative involves wirehouse brokers who take early retirement and then go to independent firms. "It's a triple score," he says. "They take early retirement and are free to negotiate with a second firm for an upfront bonus, and then sell the book to a second broker."

"A slower alternative for someone who's not ready to retire is to do a merger," Vigeveno says. An independent rep can merge with another person's practice and stay for several years prior to stepping down.

Independent advisers can also sell to an outside buyer. Financial firms are hot acquisitions these days. "There is a bona fide market of firms with the capital to buy them," says Mark Tibergien, a valuation consultant and principal with Seattle-based Moss Adams LLP. "There are CPA firms, community banks, other advisers or planners, or roll-up firms [consolidators] that are actively looking for practices to buy."

However, the window of opportunity to sell to consolidators will be small, says John Bowen, CEO of Assante U.S. Capital Management in San Jose, Calif., a consolidator. "Reps who want to sell should get their house in order quickly," he says. "There will be a wave of consolidation at a high price." That will be followed by a cooling-off period as consolidators struggle to mesh different cultures, Bowen adds.

What Is it Worth?Before selling, a broker has to put a value on the book. One way to do that is to have a professional valuation done, which takes 30 to 50 days. There are several factors that affect valuation, Tibergien says. They are cash flow, potential for growth, risk (including management structure), technology, investment style and assets, the client profile, and "the degree of uncertainty as to whether the entire business will transfer," he says. Geography, broker/dealer affiliation and the nature of income--commission versus fee--also play a part. In general, a fee-based business is more valuable than a transaction-based book because the income stream is predictable.

In the business valuations Tibergien conducted last year for 50 practices ranging from $9 million to $2 billion in assets under management, the average price was about 1% of assets under management with a high of about 2.7%. Those valuations averaged out to be about 1.46 times revenue.

Even so, most brokers don't sell their businesses outright. Earn-outs, in which the buyer pays a percentage of future gross income for a defined period, are common.

For example, the buyer may pay 25% to 50% of future gross for three to five years. In a second type of earn-out, the buyer pays a fixed price that's taken out of earnings.

A broker can come up with a valuation for his business, but the terms and tax implications can affect the actual price--and even be harmful, Tibergien warns. Whether a rep uses an S-corp or C-corp structure and does a stock or asset sale or an earn-out or outright sale can impact the ultimate price.

One deal Tibergien saw neglected to include a noncompete clause, and the selling broker ended up competing with the buyer. Another apparently fairly priced deal had staged payments. But since the IRS imputes interest income on the amount due, the price was actually less.

What Are the Transfer Trends?Business succession is becoming a big issue in the industry.

"Many advisers have become aware that they have tremendous equity potential in their businesses, but it's unrealized," Bowen says. "They haven't structured their business for transferability."

The business might be more transferable within the family or the firm. Tibergien estimates that 60% of transfers are done internally. Brokers are also negotiating semiretirement deals with other reps or money management firms.

Some reps are skipping retirement altogether. "In wirehouses, some of these guys won't retire," Vigeveno says. "They'll go independent and then sell their practice or get involved with partners."

And although they advise clients on business succession regularly, a significant number of brokers refuse to address the issue for their own practices. "A study done last year found that around 20% of advisers let their practices die slowly or closed their doors," Tibergien says. "They would rather die with their boots on and never retire."

That may solve the book transfer problem for the broker, but it doesn't do much for the broker's heirs.

American Express Financial Advisors has a program called Continuity of Practice. The firm offers a workbook to help reps considering the sale of their practices. It has sample contracts, legal documents, and information to help them value their books and select buyers, says Norm Weaver, senior vice president of retail distribution and advice, who runs the program.

In addition to assisting reps with internal practice transfers, the firm also guides advisers who want to purchase an outside practice. American Express is developing a program to help reps finance these transactions.

Edward Jones does not have a formal policy on selling a book of business, a spokesperson says. "Oftentimes, if a broker has announced an intention to retire, a second broker will be brought in, and they will work together to transition clients," the spokesperson says. They may negotiate a commission-sharing arrangement, such as 80-20 for the first year, 60-40 for the second year and 50-50 for the third year.

Edward Jones is set up as a partnership and a lot of brokers have ownership, the spokesperson says. "If they truly retire, they are able to leave capital in the firm as long as they're alive."

Everen Securities has a Sunset Program that's been in place for about six years. The retiring broker selects a rep in the office (or one can be recruited) to take over his book. During a transition period of generally one year, the two negotiate a commission-sharing agreement. Then, the retiring broker leaves and collects a fixed payment for one to two years based on the value of the business.

Bob Lemke, senior vice president of compensation and benefits for Everen explains, "To figure out the ongoing stream, the main item is assets that remain with the firm. The second factor is what kind of business it is. A transaction-based business is valued less."

Merrill Lynch does not have a formal transition program, but reps can turn over their books to other brokers, work reduced hours, and split the revenue as long as they're still employed at the firm.

PaineWebber's Retirement Enhancement Program is an optional program for brokers who want to turn their books over to other reps. The program has a four-year schedule for transitional revenue. The firm would not provide details.

Prudential Securities has operated a program called the Client Continuity Plan in certain states for the past six years. A retiring broker works with his or her branch manager to select a receiving broker. The retiree receives 50%, 40% and then 30% of the book's revenue over three years. Selling a book outright is not permitted.

Salomon Smith Barney has continued Shearson's Franchise Protection Program, first introduced in May 1993. There are two sets of criteria for a broker's participation. The broker must be 55 years old with 10 years of service and fall in the first or second quintile in production. Or the broker can be 55 years old, have 15 years of service and no production requirement.

Both alternatives require a clean compliance record. The retiring broker chooses a receiving broker and negotiates a payment split. The chosen broker and split are subject to firm approval. The payment must extend no more than five years after retirement. The firm recommends a 60-40 or 70-30 split, declining from there.

The Franchise Protection Program is approved in 36 states. In the other states, a commission split is not permitted. Instead, a fixed price can be set for a book. The payout can be made over a couple of years.

In 1994, Jim Zogby approached Jim Welton, a First Allied Securities broker in Peoria, Ill., to buy his book. "I was a day late and a dollar short," Zogby remembers. Welton had already sold his business to another broker for 1.75 times gross revenue over a five-year period. As part of the deal, Welton was to work part time for five years.

However, in January 1995, Zogby bought 25% of the buyout from the other broker. By July 1997, the other broker couldn't make the payments, so Zogby paid him a small sum, assumed the payments to Welton and took over the remaining business.

"One of the crucial things [in selling a business] is to pick somebody with the same philosophy," Welton says. The original buyer had a "concentration in mutual funds, and he bought a business that was old-line stocks," Zogby says. The buyer's other mistake was not getting a Series 24 license, which makes running the business much smoother from a regulatory standpoint.

After this year, Zogby will own the business. Welton will get a flat fee monthly for staying on part time, which was also part of the original deal.

In fact, Zogby has been so happy with the arrangement that he has bought other brokers' books and has expanded to four other cities. "I'm having a ball and making money," he says.

Six years ago, Ken Beach, then a branch manager at Smith Barney in Colorado Springs, Colo., was returning to production at the same time broker Chuck Hemmingsen was thinking about retiring. So the two reps made a two-year, commission-splitting agreement for Beach to buy Hemmingsen's book.

What's most important in matching buyer and seller? "First and foremost, make sure your investment styles are compatible," Beach says. "If not, you're asking for trouble." Both reps were conservative, but Hemmingsen was more bond-oriented and Beach more stock-savvy. "It worked out well for the clients because they felt they needed more stock exposure," Beach says.

During the first six months of the transition, the two reps met with as many clients as possible. "We retained every client," Beach says.

In July 1996, after the transfer was complete, Beach found another compatible partner, Craig Ralston. They subsequently started their own firm, Cascade Investment Group with offices in Colorado Springs and Denver.

Beach has no regrets about buying Hemmingsen's book. "Overall, it was a good deal," Beach says. "It was very positive for Chuck, too. It gave him an income stream and peace of mind that his clients were well taken care of."

Ten years ago, when Hank Lucas teamed up with Ray LaPalme to share office space and expenses, retirement was not on his mind. The two planners with American Express Financial Advisors purchased an office condo in Waterbury, Conn., but maintained separate client bases.

In 1998, Lucas, a 30-year veteran at age 65, decided it was time to move on. It made sense to transition his business to LaPalme. "We knew each other, and we had time to build up trust," Lucas says. It was also a plus that Lucas' clients would continue to visit the same office and were familiar with the staff.

Lucas had a professional valuation done. "The result was a little lower than I expected," he says. It stated that 70% of the practice's value came in the form of his "consulting" services to the practice (a valuation description unrelated to money management consulting), and 30% came from other items such as goodwill and a noncompete clause. The sale was structured so LaPalme would pay Lucas for one year as a consultant (the 70% portion) and 30% over three years.

The deal specified that Lucas would introduce LaPalme to the top third of his client base, which he did in the first half of 1998.

Now Lucas is fully retired, doing charitable work, serving on the CFP board, golfing frequently and traveling with his wife. "I'm enjoying myself," he reports. "I don't have the pressures of my practice anymore."

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