Financing Options on Buying an Advisor’s Book – Part 3

Creative Financing Options on Buying a Financial Advisor’s Book

One of the most important aspects of buying an advisor’s book of business is to ensure that the clients make a smooth transition to their new advisor owner.  Depending on the size and complexity of the book, this can take up to 2 years or more.  So, its in the purchaser’s best interests to ensure that the seller is willing to stay active and be motivated to transfer the business to the new owner.

I have witnessed many deals and I have never seen a deal whereby a seller demands and receives 100% of their asking in cash, as a down payment.  I think this is a recipe for disaster.

In structuring a fair deal for both parties, I believe a purchaser should never offer more than a 50% down payment to purchase a book.  The balance should be paid out to the seller over a 3 to 10 year period, depending on individual circumstances.  The three-year term as a minimum is deliberate.  A seller should have “some skin in the game” to ensure that they’re motivated to transfer the client base to the new owner. 

Ideally, from a purchaser’s point of view, the payment terms should be at no interest and based on either quarterly or monthly payments.

Depending on the financial status of the purchaser, a larger down payment in cash should mean a lower negotiated price and better terms.  If the purchaser does not have the financial resources to provide a large down payment, then some creative financing options should be considered such as:

·      - Don’t haggle with the asking price.  Give the seller want he/she is asking and focus on negotiating favourable terms such as a longer payment term.

·      - Offer a higher price, if necessary, and negotiate on the favourable terms. If the seller is motivated to deal with you, get the seller involved in the financial analysis of buying the book and ask for their help in coming up with solutions

·      - Consider a home equity loan. Considered to be one of the cheapest forms of financing.

·      - Speak to your product suppliers. Some of them may be willing to provide financing.  This might be an ideal route to use as long as you don’t have to compromise yourself and your clients by agreeing to sell the lenders products and services.

In conclusion, the seller’s hardest job will be to find a suitable successor for his/her client book.  Once a seller finds such an individual, they will be motivated to help the purchaser get involved.  Both parties should keep their minds open and creative during negotiations.  Good luck.