If you’re buying or selling a book, Todd Fulks knows you’re obsessed with multiples. He’s heard them all: 1.5 times revenue; 2.5 times gross trailers; 1% of assets under management. But he can’t stress enough, “You should not use a multiple to do valuation.”

Fulks is general counsel and senior vice-president of the transaction division at FP Transitions, an Oregon-based firm that’s valued more than 2,000 financial services businesses.

Each analysis comprises over 100 data points, so it’s not surprising Fulks is frustrated by the fixation on standardized multiples to value companies. “They are averages of hundreds of actual sales,” he says. “And the average doesn’t represent any particular transaction.”

Farley Cohen, chair of the Canadian Institute of Chartered Business Valuators and a principal at Cohen Hamilton Steger in Toronto, has also encountered sellers who just want a valuation that states a multiple. But “that doesn’t get you far, because the purchaser is going to do due diligence,” he says.

And that due diligence entails more than just numbers.

Strategic fit

“There’s a lot of homework that has to be done,” says Sandra Foster, author of Buying and Selling a Book of Business: What every advisor and planner should know. She uses the example of buying a house. “Price is just one consideration. You wouldn’t buy it without walking through the door.”

While Cohen can rhyme off a list of considerations, the ability to retain clients after the sale is key. Many deals involve a price that’s payable over time, and is largely contingent on how many clients stick around. “If the vendor does a good job transitioning those clients to the new purchaser, the likelihood is much higher they’ll stay,” says Cohen.

In fact, FP Transitions’ valuation department finds advisors who transition with the proper planning and structure retain at least 88% of clients. For fee-only advisors, this rate averages up to 97%.

“There has to be a strategic fit between the buyer and seller,” says Bob Labrecque, director of succession planning at Manulife Financial. “If the buyer has a different business philosophy, the transition shock is greater.”

For Noreen Mejias-Bennett, business philosophy was top of mind when choosing a buyer. With multiple designations and a holistic approach, the former Ottawa-based advisor wanted a similar successor. She interviewed three prospective buyers about their training philosophies, practice characteristics, approaches to client care and current clients. She ended up choosing the candidate committed to lifelong learning.

“Although it was tempting to sell to the highest bidder, I was driven by who would be the best fit,” says Mejias-Bennett. “I could not have egg on my face. How could I look at my clients a year later in the
grocery store?”

One candidate didn’t make time to read the 12-page client backgrounder Mejias-Bennett had prepared, so she knew that advisor wouldn’t have nurtured her client relationships.

“The years of goodwill and depth of rapport I built have value, not just the amount of annual recurring revenue per client,” she says. While her buyer decided to get rid of clients with assets under half a million, the majority of Mejias-Bennett’s book has stayed since the sale in 2010.

Retaining clients was one reason advisor Michael Moore, director of Moore Financial in Ottawa, decided to sell his book to son Jeremy Moore, who’s now president. Jeremy has been with the practice since 1994 and many clients assumed the father-son handoff would be taking place. In fact, no clients left as a result of the handoff.

Handing over the keys

But that retention didn’t just occur because of the fit between buyer and seller. Over the past five years, Jeremy gradually got to know Michael’s clients. After the Moores decided on a sale date, the two met with nearly all Michael’s clients to brief them on the transition. This took about one year.

To make this process easier, “We grouped them into people I had a strong relationship with, people I knew well personally but not financially, and people I didn’t know,” says Jeremy, and adjusted their messages accordingly.

Mejias-Bennett didn’t have the luxury of time, but she still took a month to meet with all clients to let them know she was selling. During the meeting, she shared her criteria for choosing the new advisor, and let clients know that she would be entrusting her personal finances to the new advisor. “Their responses were, ‘We trusted you. If he’s good enough for you, then we have confidence in your decision,’” says Mejias-Bennett.

She also held joint appointments over the next two months with her and the new advisor so clients could ask questions. “I also left the door open: should they wish me to be present for a subsequent meeting, I would be available with the strict understanding I could not offer financial advice.”

This type of overlap can smooth the transition.

“There are certain relationships we’ve decided Michael shouldn’t be completely cut off from,” says Jeremy. “It didn’t make sense to stop and start from scratch.”

This raises another question: how long does the seller stick around?

“It’s important for both parties to understand the expectation,” says Jeremy—and getting it in writing is crucial. “I’ve heard stories of a seller who says he’s getting out, yet won’t let go. Or the guy says he’ll stay, and once he realizes he doesn’t have to he isn’t around.”

Will your new clients face a new compensation structure?  Click through below to find out how this can complicate matters.

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