How to establish an effective strategy to buy a book of business - The Globe and Mail

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Demonstrating a well-performing business with a strong client experience is essential to persuade sellers to choose a practice for their succession plan.IPGGutenbergUKLtd/iStockPhoto / Getty Images

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For most advisors, finding new ways to increase growth and cash flow is often top of mind.

Rarely have we met an advisor who hasn’t brought up acquiring a practice as a requisite to scaling their business. Moreover, a well-structured inorganic growth strategy can increase a practice’s value – something advisors often ignore even though it may be the most important investment they hold.

When done right, inorganic growth has the potential to deliver tremendous value and profitability to an acquiring practice’s owners. However, a rushed process not built on a structured business can create negative owner value.

To ensure the success of an inorganic growth plan, it’s crucial to first establish a well-run practice with strong organic growth characteristics. While there’s no one-size-fits-all structure, an efficiently run practice is a necessary foundation.

How to define an inorganic growth strategy

It all starts with answering a few key questions: Who’s your target client? What’s your value proposition? What client experience and service model do you want to provide?

Having clear answers to these questions ensures focus on the right activities and helps staff prioritize their work in alignment with the practice’s objectives. As a practice’s focus is refined and business processes mature, metrics across the board improve.

Advisors will experience an increase in client satisfaction and growth in referrals, both resulting in deeper and more meaningful relationships. Attrition rates should decline along with the cost of service – all of which are essential to growth.

Once an organic growth strategy is in order, it’s time to turn your attention to inorganic growth.

Advisors selling their books typically choose an acquirer based on the trust that they will serve their clients well and support their growth objectives. Industry experts estimate that each seller has anywhere between 50 to 75 buyers to choose from.

Demonstrating a well-performing business with a strong client experience is essential to persuade sellers to choose a practice for their succession plan. From a value creation perspective, integrating a firm into a well-run business can increase the equity value of the purchased business immediately by two to three times the initial purchase price.

Navigating the acquisition landscape

One thing to contemplate when considering an acquisition is whether additional advisors are needed or if the practice is only looking to add assets. Both are acceptable approaches that require different strategies. Having clarity on the goals will help evolve the strategy and develop clear target candidate profiles.

As an advisor starts to source books of business, here are some other key questions to consider:

• Does the strategy merit focusing on retiring advisors with an established client base, advisors earlier in their business who could be part of a succession strategy or those with a different profile?
• Do you want to acquire a practice close to yours or are you looking to extend your geographical presence?
• Do you want clients similar to your target client or are you looking for a different target?

Setting strategic goals will also drive deal structuring while sourcing books of business. If advisors are looking to manage a book of assets, a growth incentive may not make sense. Conversely, if growth is one of the strategic goals, then the deal should be structured to support that. If the acquisition is bringing in a new advisor to the practice who is seen as a strategic partner, more equity will be essential to the deal versus a transitional situation in which more cash will be involved.

With an effective vision, an advisor can craft a standard elevator pitch that identifies their practice’s operating methodology and unique features. Articulating how the practice can create value for advisors looking to sell their books and their clients will be critical. Advisors looking to buy books of business will eventually tailor their description for each target firm, but getting it down on paper will help improve the messaging.

Structuring the deal

Once there’s a target advisor profile and buyers are ready to get a deal done, there are a few key trade-offs to consider:

• Upfront versus deferred payments: Longer-term payouts can have tax advantages and help manage cash flow.
• Guaranteed versus contingent: Are there incentives and upsides for performance? Some advisors will prefer certainty, others want to participate in the upside and performance of the book.
• Cash versus equity: More strategic partners who are seen as a long-term part of the practice will want to use more equity to align incentives.

While many advisors focus on the deal itself, what’s more important is the effectiveness of integration. Time needs to be spent to prepare the plan from announcement through to onboarding. A team needs to be established with clear roles and responsibilities to execute the transition of clients and integrate the staff and clients into a practice. Too often, these are forgotten in the process, but clearly articulating “What’s in it for me” for both audiences is the first step in building the trust needed for a long-term relationship.

Advisory practices that have a defined plan with clear timelines, roles, and responsibilities find that they capture two to three times greater value from the transaction than those that don’t. This value is recognized in the near term through cash flow, but longer term through increased equity value. Like all aspects of business, a successful acquisition requires advanced planning and thought. Making it up on the fly will not only risk the acquisition but your current growth as well.

Jeff Gans is chief executive officer and managing partner of Purpose Advisor Solutions in Toronto.

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