How to Buy a Financial Advisor Practice

Buying a financial advisor practice could be a wise investment if you’re interested in scaling an existing business. If the purchase includes a stable client base, that could open the door to an increase in your revenues. Likewise, you might consider acquiring a practice if you’re just getting started and want to hit the ground running with already clients in place.

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Why Do Financial Advisors Sell a Practice?

There are a number of reasons why an advisor might choose to sell their practice. One of the most common is that they’ve decided to retire.

When an advisor is ready to retire, they may have a few options for passing the business on. For example, if the practice is family-run, the reins of ownership and management may be handed over to one of their children or siblings. If there’s no one to succeed them internally, then an outright sale may be the next best option.

The decision to sell can be motivated by factors other than retirement. An advisor who’s experiencing an ongoing health issue that prevents them from fully meeting their clients’ needs may be inclined to sell to someone who can. Advisors may also choose to sell if they’re pivoting their business in a different direction or are pursuing an entirely new career path.

Of course, it’s always possible that an advisor may be looking to sell if the business is struggling and they’re ready to walk away. Understanding some of the reasons why an advisor might sell is important if you’re hoping to buy a practice. Having that background knowledge is helpful for gauging whether a deal is a good investment.

How to Buy a Financial Advisor Practice

Buying an existing practice is a fairly straightforward transaction, but it’s helpful to know what to expect. It’s also important to assess how buying a practice might benefit you and what risks, if any, it might involve.

This checklist can help you better prepare for buying an advisory practice.

Review Your Finances

Before you begin looking for a practice to buy, start with an assessment of your finances. Here are some of the most important questions to ask:

Is your business profitable?
How much capital do you have available to invest in the purchase of a practice?
Will you need to secure financing to complete the acquisition?
Do you have the cash flow to support loan payments if financing is necessary?
What other new expenses might you incur when buying an advisory business?

These questions are designed to give you a sense of what’s realistic now and going forward. It’s also a good idea to consider how much of a loss you might be able to sustain if the purchase doesn’t go as planned. For example, if your newly acquired clients decide that they’d rather go elsewhere, that can directly affect your return on investment in the business.

Research the Practice’s Financials

Once you’ve taken a closer look at your finances, the next step is to dig into the financial details of the practice that you hope to buy. Some of the questions to ask at this stage include:

How are the practice’s fees structured?
Are there any recent appraisals of the company’s value available?
How much revenue has the business generated in the past 12 months?
What is the average revenue per client?
What are the firm’s total assets under management?
How much does the company spend on operating expenses?
How much debt does the business have?
What does the compensation model look like for upper-tier employees?

Essentially, you want to know two things here: how the company makes money and where that money goes.

If there’s no recent appraisal available, you may want to have one done yourself. Having an appraisal in hand can give you a better idea of the business’s value, which is helpful when deciding how much to offer. If any practice that you’re interested in buying is reluctant to share financial details or estimates of value, that could be a red flag that it’s struggling.

Look Into the Company Culture

Understanding the culture of an advisory practice can tell you a lot about how it treats its employees and its clients. Here are a few things to consider that can give you a better idea of how a company operates:

What is the employee turnover ratio?
Is client retention an issue or do clients tend to stay with the firm long-term?
What policies does the practice have in place for things like working from home, time off, employee wellness and employee benefits?
How engaged are the employees?
What is the company’s overall reputation?

Talking to employees is a good way to get insight into how the company works and what the culture is like. It can also be an opportunity to reassure employees that you’re committed to preserving that culture as much as possible should you decide to purchase the business.

If you find that a practice’s culture is completely different from yours, that could make the transition more difficult for employees and clients. In that scenario, it’s important to consider how much turnover you could reasonably afford on either side if you were to buy the practice.

Work Out the Legal Details

Once you’ve found a practice that you’d like to purchase, you’ll need to jump through the various legal hoops required to seal the deal. Hiring an attorney who’s experienced in the sale and purchase of existing businesses can ensure that this part of the process goes as smoothly as possible.

For example, you’ll need to agree on the purchase price and completion date for the acquisition. You’ll also need to work out exactly what’s included with the purchase and what steps may be necessary to retitle any business assets you’re taking ownership of.

Finally, the advisor who’s selling should arrange an introduction for you with staff and clients. That’s an opportunity for you to get to know them a little better and offer reassurance about what they can expect going forward.

How to Find a Financial Advisor Practice to Buy

If you’re in the market to buy an advisory practice, there are a few ways to go about finding one to purchase. Here are some of the possibilities you might consider:

Tap your network. Networking can help you make new professional connections and potentially find new clients. If you have a solid network of advisors, you might ask around to see if any of them are contemplating selling or know someone who is.
Online marketplaces. There are numerous online marketplaces that allow financial advisors to list their practices for sale. The upside of using a reputable marketplace is that deals are typically vetted beforehand, saving you time when it comes to due diligence. However, keep in mind that you may pay a fee to the marketplace to facilitate the transaction, which can increase your overall cost of buying.
Ask advisors directly. If there’s a particular practice that you’re interested in buying, you could always reach out to the advisor directly to see if they have any interest in selling.

Bottom Line

Buying a financial advisor practice could make sense if you’re hoping to expand or you’re looking for a turnkey business, rather than trying to build your own firm from the ground up. Knowing what’s typically involved — and what the biggest risks are — can help you to decide if this kind of investment is right for you.

Tips for Growing Your Financial Advisory Business

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Thinking outside the box is another way to get new clients. Instead of limiting your marketing efforts locally, consider how you can expand your digital footprint. SmartAsset’s recent survey shows that many advisors expect to continue meeting with clients remotely following COVID-19. If you’re not utilizing the power of virtual meetups yet, you could be missing out on valuable opportunities to connect with clients.