Brokers to the Brokers

When Silas Shaffer decided to become a retail rep after almost 30 years as a corporate finance planner, he took a cue from his employer, General Electric: If you don't have it, acquire it. After all, it would take several years to build up the clientele of an advisory business, and at 51, Shaffer wasn't interested. So he started looking for the ideal clients to buy. Shaffer's story is not unique.

When Silas Shaffer decided to become a retail rep after almost 30 years as a corporate finance planner, he took a cue from his employer, General Electric: If you don't have it, acquire it. After all, it would take several years to build up the clientele of an advisory business, and at 51, Shaffer wasn't interested. So he started looking for the ideal clients to buy.

Shaffer's story is not unique. About 200 practices were purchased last year, according to FPtransitions. The firm, based in Portland, Ore., was founded in 1998 to help financial advisors buy and sell practices — for which it gets a fee. “So far this year the number of sales of practices is up big time,” says principal David Grau. He attributes the rise to a higher awareness of the possibilities, the recession and the fact that many older brokers are retiring.

FPtransitions isn't the only matchmaker. Another, iValue, actually provides its services for free. The catch? It is a division of SunAmerica and yes, a buyer must remain under the SunAmerica umbrella. Ditto with Practice Exchange, part of Mutual Service, which keeps transactions within the family.

Last year, FPtransitions handled about 100 transactions. The experience has helped it streamline the acquisition process. Grau compares the procedure to buying real estate. “Not many houses would sell if you had attorneys and CPAs in the process too early,” he says. “By having standard forms, it makes the process much easier. We've reduced the process to mostly a fill-in-the-blank process.”

The streamlined procedure was attractive to Shaffer. Last November, he filled out an online form, stating his main requirements: He wanted a local practice that focused on estate planning. Within moments, a practice caught his eye. It belonged to a planner who recently relocated to another state.

At first, both communicated via e-mail. Then the owner whittled down the list to three potential buyers, including Shaffer.

Why Shaffer? A big part was his experience and outlook. The seller spent many years building her practice and wanted to make sure her clients were in capable hands. “This is potentially a very emotional time for sellers,” says Mark Tibergien, a principal at the Seattle-based accounting firm of Moss Adams, which handles valuations for financial planning practices. “The highs and the lows are extreme.”

In fact, expectations of the seller and the buyer are vitally important. While FPtransitions has automated a major part of the acquisition process, there is still handholding. “We actually talk to our Web clients,” says Grau.

A critical misconception is that sellers think they will get a big fat check. Far from it. A deal is likely to be a blend of a cash down payment and earnout — with the cash being about 25 percent of the purchase price. The earnout is based on achieving certain goals, such as reducing client attrition. “If structured right,” says Grau, “you can devise an earnout structure that results in keeping at least 90 percent of the client base.”

After the initial online contact, Shaffer had a phone conversation with the seller, followed up by a meeting. “We had instant rapport,” he says. “We knew it was time to go to the next step and make the transaction happen.”

This meant due diligence, in which Shaffer spent a week at the practice digging into the files. It was certainly helpful that FPtransitions had a standard checklist to help ferret out potential time bombs. Some questions: What are the client complaints on file or pending arbitrations? What is the main source of revenue? Are there any labor claims? Is the insurance current? What are the terms of the lease?

Even if problems are uncovered in the due diligence process, the deal doesn't necessarily implode. Instead, the problems can be used as leverage to negotiate a lower valuation.

Valuation, by the way, is a typical deal killer. “It is easy to get caught up in the emotion,” says Tibergien, “As a buyer, make sure you know what you are getting, and you are not overpaying. If it takes you longer than five years to pay this off while still earning an income from the practice you bought, you probably paid too much.”

Shaffer did not use an outside valuation firm but instead negotiated the price based on research from FPtransitions. This was done using a price-to-gross revenue multiple. Grau says that while the ratio is about 1 to 1 for commission firms, it is about 1 to 7 for fee-based firms (a great resource can be found at practice-exchange.com, which has a sophisticated calculator for practice valuations).

In all, it took about a month for Shaffer to close the transaction, which is about the average.

Shaffer reports a smooth transition. It took about three months for the handoff. Client attrition was only 10 percent.

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