Financing Options - How to Buy a Financial Advisor’s Book of Business

As you read through our blog, you’ll notice that we’ve written several articles on the do’s and don’t’s of selling and buying a financial advisor’s book of business.  One of the most important things that a buyer should do prior to approaching any potential seller is to do their homework.

As an example, if you’re shopping around for a new home, an experienced real estate agent will suggest that you obtain pre-approved financing prior to beginning your search.  Pre-approved financing helps the purchaser understand what they can afford to buy and furthermore, gives the potential seller confidence to enter into negotiations with the pre-approved purchaser.  Nothing can be worse for the seller to enter into negotiations, take their home off the market only to find that the purchaser’s request for financing has been declined.

The same should hold true for financial advisors that would like to purchase another advisor’s business.  Several options are available to the potential purchaser such as applying for a secured and/or unsecured line of credit, speaking to the current dealer or MGA about internal financing options and also running some financial analysis on a potential offer that would include some cash and seller financing.  A purchaser that can confidently offer a prospective seller some assurance with regard to financing will be held in higher regard than a purchaser that is unsure of their financing arrangements.

One of the questions that I’m commonly asked is “ If an advisor’s business is valued based on their annual revenue, how can I easily know if I can afford to buy the business without asking them some personal questions about their annual revenue figures?” Well, you don’t have to.  A rough rule of thumb is the rule of 0.70%. That is, if an advisor tells you that they manage a mutual fund book of $10,000,000, then multiple their assets by 0.70% to come up with a ball park annual revenue figure ($70,000).  Advisors are more open to discussing their assets under administration and this will give you a general idea if you can afford to buy the advisor’s business or not. If you can’t afford to buy a $100 million book, then don’t waste your time.

In my future blogs, I will expand on various financing options that you can use to purchase a book without having to put down a lot of cash. Stay tuned.