BUSINESS SELLER BEWARE: THE ENEMY MAY BE YOU

When it comes to selling their businesses, financial advisers are often their own worst enemies.

Lack of preparation and overly optimistic perceptions of how much their busineses are worth can be bigger barriers to a deal than the quality of a planner’s book of business, says Mark C. Tibergien, a principal of Moss Adams LLP, a Seattle-based accounting and consulting firm.

He was one of several speakers to address the often thorny issue of selling a practice last week in San Antonio at the annual meeting of the International Association for Financial Planning.

Often “the people who are in this business who are trying to sell their practices are not emotionally or financially prepared to make a decision,” said Mr. Tibergien. “Most of you may have an inflated perception of value.”

While most advisers turn their practice over to insiders, selling to outsiders has become an increasingly popular method of succession planning as more advisers near retirement age, says Chip Roame, who spoke along with Mr. Tibergien and is managing principal of Tiburon Strategic Advisers, a California consulting firm.

Closing deals hasn’t proven easy though. Many firms that have declared themselves acquirers have backed off, including Lockwood Financial Group in Malvern, Pa., and M Financial Group in Portland, Ore. Other potential buyers, such as banks, often still are trying to form a coherent strategy.

The inadequacies of advisers can further complicate the process. They often fail to prepare far enough in advance for a sale — Mr. Roame says they should start planning five years in advance — and don’t invest in technology and other areas to make the practice more valuable.

looking for mr. buyout

Many advisers hope to fund their retirement primarily through the sale and many times ask for far more than they can get. Mr. Tibergien points out that there are more sellers than buyers right now.

“There is a fixation on a number that may not have any basis in reality,” Mr. Tibergien says.

As an example, he cites an adviser who wanted to sell for about $1 million. The buyer wanted to offer approximately a tenth of that.

Other adviser weaknesses when it comes time to sell include a lack of experience in making deals, big egos and inconsistencies among advisers in such areas as back office, custody and client niches.

Buyers often want the adviser to stay on for a while after the sale to run things, Mr. Tibergien says. So it’s important for the potential acquirer to believe it can work with the seller.

Assante Corp. is another firm trying to buy financial planning shops.

John Bowen, president and chief executive officer of the Winnipeg, Manitoba, Canada, firm’s U.S. affiliate Assante Capital Management Inc., imparted several characteristics he looks for in potential acquisitions. Among them: The ability of the shop to function without its chief and a single owner.

“If you had multiple owners, I wouldn’t talk to you,” he said. If differences arise among shareholders, “it can blow up.”

One adviser successful at selling his firm is John Rafal, an Essex, Conn., adviser who sold 60% of his business to Essex Savings Bank last year.

Those attending the conference scribbled down the valuation formula he used: One percent of assets managed plus seven times net profits plus three times gross revenues divided by three.

“You have to make a decision at some point. How do you make an exit strategy,” he said.

He added that it is important to maintain a clear head while negotiating. While he and the thrift executive he negotiated with wanted to get the deal done, their attorneys often were at each others’ throats.

“We had to calm down the lawyers,” Mr. Rafal said.

Advisers who sell to banks and stay on must be able to adjust to working with a more staid, less sales-driven organization — and be willing to prod the acquirer to evolve.

works like a bank

For instance, Essex and Mr. Rafal created a separate organization to handle bank customers, which markets more like a bank than a broker.

“They’re changing more than we’re changing,” Mr. Rafal said. “Banks have to understand it’s a totally different culture.”

In the end, selling to outsiders may not be the right approach for all advisers. Paul R. Kenworthy, a Minneapolis adviser, says his practice — which caters to a handful of wealthy customers and recommends stocks instead of mutual funds — is too specialized to sell out.

“I don’t think I have the right type of practice to sell,” says Mr. Kenworthy, who previously built up a practice and then sold it to insiders. “Big companies want to buy somebody more easy to replicate.”