Exit planning: Successfully reaching qualified buyers

Building a practice is no easy task, but when the time comes time to sell you want to make sure you’re getting the best possible deal. Unfortunately, many advisors don’t know the first thing about putting their business up for grabs.

Selling a practice isn’t as simple as calling your competitor and negotiating a price — it’s one of the most complex transactions you’ll engage in during your career. To break it down, here are four things you’ll need to do before you can sign on the dotted line.

1. Identify potential buyers

The best time to develop a list of possible buyers is while your practice memorandum is being prepared. You’ll probably have specific ideas about who you want to approach and who you’d rather not include in this process. Bear in mind that someone close to you — an employee, a family member, an associate or a competitor — may be your most logical prospect.

Make sure your initial list of potential buyers is as broad as possible. A large list makes it easier to reduce the numbers later. You don’t want to add to a short list when you’re deep into the selling process.

Rank your list of potential acquirers from most to least logical. To assist with this ranking, do a characteristic assessment, using the following questions, for each of your potential buyers:

• What is the potential synergy between your practice and their existing operations?
• Do they have capital or financing available to close the transaction?
• Do they have any experience completing acquisitions?
• What is their geographical proximity to your business?
• How do they intend to grow following this acquisition?

2. Marketing your practice

Getting the word out that your practice is available is the best way to start the sales process. Do this by placing ads in trade publications or on websites that list practices for sale. Also ensure that your supplier, dealer and MGA know about your intentions. You might also want to hire a business broker to help locate potential buyers.

The idea here is simple — the more people who know you want to sell, the more likely the news will reach a serious buyer. That said, making a grand sales pitch isn’t always the best strategy. In some cases, discretion, if not secrecy, is a better approach, particularly if you fear that disclosing your plans might cause key employees to defect or if the news could scare clients into looking elsewhere.

So just how broadly should you market your practice? There’s no right answer. Each case should be analyzed individually. The following are some considerations that affect the decision:

• How quickly must the transaction be completed? In general, the shorter your time horizon, the shorter your list of potential buyers.
• How complicated is the business or the transaction structure? If the intrinsic value of your practice does not come across well in your memorandum, it is often best to focus on a few select buyers.
• How has the business been performing? If buyers have trouble grasping your practice’s value, it’s probably best to concentrate your efforts only on the most interested individuals.

In most cases, your A-list of buyers will include five to 10 interested parties, but that number could be as low as three or as high as 20. You’ll want a B and C-list as well, in case the better options fall through.

While the marketing phase can be exciting, don’t forget a few important things:

• Just because people are interested in your business doesn’t mean you’ve sold it yet. You never know if the sale process will end with an unacceptable offer.
• Carefully plan out when and how you will tell your employees about the impending sale.
• Ensure that your practice memorandum is clearly understood and supported by the people who will have regular contact with potential buyers.
• Execute confidentiality agreements with interested purchasers.
• Maintain momentum by asking yourself what you can do to avoid delays once the process is rolling.

3. Contacting potential buyers

In general, it is most effective to make the first contact directly by telephone. This allows you to position the opportunity in the most favourable light, gauge first reactions — these are critical and often most telling — and set the stage for any follow-up.

Once you’ve sussed out the people you’re dealing with, you can reduce the buyer list to three or four bidders, who will then vie for your practice.

4. The bidding war

The first step in the bidding process — which is similar to an auction — is to request that all parties who received your practice memorandum respond with an indication of their interest within a set time. A response shows the buyer is interested in pursuing the acquisition in more detail.

Some practitioners request that the interested parties include some or all of the following in their response:

• Confirmation of their ability to finance the transaction
• Any steps needed to make a definitive offer
• Time required to make a final decision
• Their reasons for making the acquisition
• A description of their plans for the practice in the future

Every part of the process is important, but investing time in the preparation phase is likely to pay off by putting you at a distinct advantage during negotiations.

Those who are best prepared generally find the sales process to be the least disruptive to their current operations; they are able to identify and deal with the greatest number of potential bidders, they command the highest price multiples and set their own stage for a successful transition.

Cindy Jenner Cowan is vice president of training and development at Worldsource Financial Management. With more than 17 years of experience in the financial services industry, the expert in relationship management and value-added coaching recently developed FRAMEWORKS, a training program for Worldsource advisors, focusing on advisory practice life cycles.