(June 17, 2003) Buying a book of business isn’t for the faint of heart. Done properly, it’s a process that could take months to complete, notes Robert O’Connor, an independent management consultant based in Vancouver.

“I know someone who took up to a year to sell his practice to another advisor,” he told attendees at the Advocis national conference in St. John’s, Newfoundland. “Don’t be in too much of a hurry to finalize the deal — extra caution pays off. Be wary of someone who is anxious to sell.”

While most selling advisors traditionally value their businesses on a formula basis (for example, charging 1.5 to 2.5 times of the trailer fees on their mutual fund/segregated fund assets), O’Connor says it can’t hurt for buyers to also examine the seller’s financial statements. He noted that a practice that shows an operating profit because the principal takes advantage of all allowable expenses can drastically change when those expenses and other items are legitimately removed.

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    Buyers need to determine what type of goodwill the book possesses. Goodwill accounts for 90% of the selling price. But personal goodwill, unlike commercial goodwill, could diminish a seller’s asking price significantly, as clients may have developed a strong relationship with the seller and may not want to continue with the buyer.

    “Just think if your dentist sold his practice to someone else and how quickly you’d run to that new dentist,” said O’Connor. “You have to look at how the buyer will be able to win those clients away from the seller.”

    One solution, suggested O’Connor, is for the buyer to negotiate that the selling advisor stay on for a minimum of six months during the transition period.

    Buyers should expect to sign a confidentiality agreement, complete with a non-compete, non-disclosure and enjoinder that states the information being disclosed will not be used for their own advantage, says O’Connor.

    O’Connor recommends that buyers, in turn, enter into a standstill agreement, a document that states the seller can’t deal with anyone else while in negotiation with the buyer. “I’ve seen deals where people look at buying and the seller is utilizing all of this information to give to somebody else and using it strategically to get a better price.”

    If, at any time, discussions are not living up to the seller’s initial description of the book, the possible buyer shouldn’t hesitate to bail, says O’Connor. “Don’t let misplaced pride colour your judgment.”

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    Filed by Deanne Gage, Advisor’s Edge, dgage@rmpublishing.com.

    (06/17/03)