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Intelligent Advisor

When to Walk Away From a Deal

It can be stressful to find the right practice for purchase. But even the best advisory practices can have issues, so it’s important to know when to step away.

“We talk about the competitive landscape and I hear it all the time in the industry articles, there’s 50 buyers for every seller. I would challenge that notion and say there’s not,” Patrick Jinks, director of practice planning & acquisitions at Raymond James Financial Services, said during the firm's national conference in Las Vegas. He said the numbers are much lower—maybe five to 10 qualified buyers per seller.

Patrick Jinks, director of practice planning

There are a lot of reasons why a practice may not be the right fit for every buyer, such as lack of operational efficiencies and financing. Perhaps the biggest issue, however, comes down to the seller’s plans after the deal closes.

“To me, the red flags start with a person who is unwilling to go through the transition process,” Jinks said. “You’re not buying a tangible asset—although there could be tangible assets attached. You’re buying relationships and relationships are not developed at a closing table between two parties. Relationships are developed over time.”

If someone is just interested in selling their practice for the highest price and retiring immediately, you probably don’t want to waste your time, Jinks said.

If the buyer’s and seller’s philosophies on life are far apart, it’s probably a good idea just to shake hands and say ‘nice to meet you,’ and move on. In about 5 to 10 percent of the deals he works with, Jinks said the buyer or seller does end up walking away.

When considering a prospective merger or acquisition target, Jinks recommends advisors pay attention to the composition of client accounts—make sure you’re buying a practice that has growth potential. If a majority of the clients are retirees, it may be worth looking elsewhere.

Advisors also should ask to see a production report for at least the last three years. Look for year-over-year growth not necessarily due to new assets coming on board or huge fluctuations in the market. “It’s making sure you’re looking at the net inflows and outflows of assets, looking at the revenue and streams of revenue—really getting a granular understanding of the practice,” Jinks said.

Staffing is also a key consideration. “If you’re looking at a practice of consequence, and they do not have employment contracts specifically with non-solicitation agreements within, that would be a huge red flag for me,” Jinks said.

Many times it’s not just the principal or managing partner who has significant relationships with clients. Often, advisors have segmented their clients, working with only a portion themselves and unloading some clients to junior associates. Additionally, clients may be very close with assistants or a para-planner in the office, Jinks said.

“Unless those parties are going to come with you, unless those relationships are really transferrable, what are you really buying?”

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