Buying a book of business? Negotiate price and ask for extras

This is the second article in a series about succession planning and acquiring books of business. Read the first article here, and look for the third article next week.
Advisors who buy a book of business need to negotiate with sellers on valuation and add clauses to the purchase price to protect their investment, according to recent buyers.
Elke Rubach, principal at Rubach Wealth Holistic Family Advisors in Toronto, paid three times annual recurring revenue for her book of 650 clients. But as part of that deal, she negotiated a clawback arrangement that stated if any clients left within the first year, she would receive money back from the retiring advisor – specifically the amount paid for the client.
For example, if a client who owns insurance policies through the retiring advisor leaves, insurance companies may only pay revenue to the advisor who started the policy, Ms. Rubach notes. “You can transfer the file, but in some cases, you’re not going to get paid so you need to be aware of that.”
Samuel Lichtman, founder and certified financial planner at Millen Wealth Advisors in London, Ont., bought a book of 20 client households last year and paid a rate of one year’s worth of revenue – well below the average seller’s valuation of two to five times derived from asset trailers. He paid 25 per cent up front, with the remaining 75 per cent paid in 12 monthly instalments.
He was able to negotiate the price because of the book’s small size and the fact the advisor was leaving the business. He notes that one client had 20 per cent of the book’s assets and represented a big financial risk. “All it would take is one big client leaving,” he says.
Compliance issues could be another risk. Even if a complaint has been resolved, “the likelihood of the client leaving is strong,” Mr. Lichtman says.
Sometimes, being at a different firm from the retiring advisor can work in a buyer’s favour. Samantha Seaman, portfolio manager with Braestone Family Wealth at iA Private Wealth Inc. in Newmarket, Ont., purchased a book from her retiring grandfather.
Her firm offered a more attractive payout than buyers at his firm; Ms. Seaman negotiated a higher bump-up with her grandfather, and her dealer helped finance the purchase.
“We financed it over seven years, with an option to pay off sooner than that and then the dealer takes the loan payments rate out of the commission,” Ms. Seaman says.
Ms. Rubach says dealer intervention is a good strategy to assist younger advisors in buying a book.
“Otherwise, who can afford to write a $100,000 cheque when they’re only making $30,000 a year when they’re starting?” she says.
As a more established advisor, Ms. Rubach was able to purchase her book six years ago through a business line of credit at her financial institution. She says financing approval was painless because the institution understood the recurring revenue business model.
A low variable interest rate pre-pandemic was an asset, she adds, but as it increased steadily because of the effects of inflation and rising interest rates, she focused on paying off the debt more quickly. “It was getting really expensive,” she says.
After determining a price, transitioning the clients to the new practice is the next step. Because of Ms. Seaman’s family connection and the fact her retiring grandfather is 90 years old, she says clients were receptive to her.
“It didn’t come as a big shock to them,” she says about her grandfather’s retirement. “They were all expecting it for some time.”
He told them about the new company and that his granddaughter would be reaching out, which she did promptly. Part of the deal included hiring Ms. Seaman’s grandfather’s assistant of 20 years, which eased the transition as she was a known commodity and respected by clients.
“She assisted in the introductions and setting up all the meetings,” Ms. Seaman says.
Mr. Lichtman put in upfront work to determine how his new clients would fit with his fee-based financial planning practice. Buying a book in which the outgoing advisor focused on investments and performance would have resulted in a major disconnect. “
I was eager to add more value,” he says. “My criteria [when buying a book] was, do the clients understand the value of financial planning? Are they open to it?”
Sign up for the Globe Advisor weekly newsletter for professional financial advisors. For more from Globe Advisor, visit our homepage.