Buying, Selling, and Valuing Financial Practices, + Website

The Authoritative M&A Guide for Financial Advisors

Buying, Selling, & Valuing Financial Practices shows you how to complete a sale or acquisition of a financial advisory practice and have both the buyer and seller walk away with the best possible terms. From the first pages of this unique book, buyers and sellers and merger partners will find detailed information that separately addresses each of their needs, issues and concerns.

From bestselling author and industry influencer David Grau Sr. JD, this masterful guide takes you from the important basics of valuation to the finer points of deal structuring, due diligence, and legal matters, with a depth of coverage and strategic guidance that puts you in another league when you enter the M&A space. Complete with valuable tools, worksheets, and checklists on a companion website, no other resource enables you to:

• Master the concepts of value and valuation and take this issue “off the table” early in the negotiation process
• Utilize advanced deal structuring techniques including seller and bank financing strategies
• Understand how to acquire a book, practice or business based on how it was built, and what it is capable of delivering in the years to come
• Navigate the complexities of this highly-regulated profession to achieve consistently great results whether buying, selling, or merging

Buying, Selling, & Valuing Financial Practices will ensure that you manage your M&A transaction properly and professionally, aided with the most powerful set of tools available anywhere in the industry, all designed to create a transaction where everyone wins—buyer, seller, and clients.

Foreword xi

Preface xv

For Sellers xv

For Buyers xvi

Acknowledgments xix

Chapter 1 The Basics You Need to Know 1

Avoiding the Critical Mistakes 1

Valuation: The Great Debate 4

Assessing What You Have Built (or Are Acquiring) 6

Who is Selling? Transition Strategies by Ownership Level 11

Overcoming Attrition: Public Enemy No. 1 14

What is Being Sold? 17

Organizing the Marketplace 20

Exit Plans versus Succession Plans versus Continuity Plans 23

The Planning Continuum 28

Chapter 2 Value and Valuation Fundamentals 31

An Overview 31

What Creates Value? 33

Standards of Value 35

Valuation Approaches and Methods 38

The Rule of Thumb Method of Valuation 46

Application of Standards and Approaches 48

Making Sense of It All 51

Who is Qualified? (to Offer an Opinion of Value) 53

Valuations for Bank Financing 54

Chapter 3 Solving Valuation 57

The Blue Book Standard 57

Lessons Learned 58

A Value Calculation 60

How It Works 61

Recurring versus Nonrecurring Revenue 65

Assessing Transition Risk 66

Measuring Cash Flow Quality 68

Fixing the Fracture Lines 69

The Profitability Issue 71

Chapter 4 Building and Preserving Value toward the End of Your Career 75

1. Get a Position Fix 77

2. Focus on the “M” in M&A 78

3. Obtain a Formal, Third-Party Valuation 79

4. Understand the Impact of Terms and Taxes on Value 80

5. Consider Alternative Strategies: Sell and Stay Opportunities 81

6. Study Reliable Benchmarking Data 84

7. Create a Plan and a Definitive Timeline 85

8. Have a Backup Plan 86

9. Sell on the Way Up! 87

10. Focus on You 88

Chapter 5 Preparing to Sell 91

What’s Your Plan? 92

Finding the Very Best Match 95

When to Sell: Timing That Final Step 98

In a Nutshell: How to Sell Your Book, Practice, or Business 101

The Listing Process 107

Making a Quick Decision to Sell 112

When Selling Isn’t Selling 113

Ten Things Buyers Will Want to Know 115

Handling Key Employees during the Selling/Listing Process 116

Letting Go 118

Chapter 6 The Buyer’s Perspective 119

A New Direction 119

If at First You Don’t Succeed . . . 121

Build a Base for Acquisition 122

What Sellers Will Want to Know 124

Understanding the Audition Process 126

Are You a Buyer or a Prospect? 133

Nontraditional Acquisition Strategies 134

Chapter 7 Deal Structuring: Payment Terms, Taxes, and Financing 143

Seller Financing 144

The Shared-Risk/Shared-Reward Concept 145

Performance-Based Promissory Notes 147

Earn-Out Arrangements 148

Revenue Sharing or Fee Splitting Arrangements 151

Earnest-Money Deposits 152

Down Payments 153

Basic Tax Strategies 154

Installment Sales 156

Asset-Based Sales/Acquisitions 157

Stock-Based Sales/Acquisitions 161

Bank Financing 164

The Mechanics of the Process 166

Blending Seller and Bank Financing Together 169

Acceleration Options 170

Working Capital Loans 171

Chapter 8 Due Diligence and Documentation 175

Conducting Due Diligence 176

Assembling and Managing Your Team 181

Advocacy versus Nonadvocacy Approach 183

Documenting the Transaction 184

Chapter 9 Key Legal Issues in the M&A Process 197

What Exactly is “Boilerplate”? 198

Reps and Warranties 199

Covenants and Conditions 202

Indemnification and Hold Harmless Clauses 207

Protections against Death or Disability 209

Default Provisions 210

Resolution of Conflicts 213

Basic (but Not Trivial) Legal Issues 215

Chapter 10 The Transition Plan 223

Regulatory Issues 224

Transferring Fee-Based Accounts 232

Setting Up for the Post-Closing Transition 233

E&O Insurance (Tail Coverage) 235

Sample Client Letters 236

Conclusion 247

Appendix: Sample Documents 249

About the Author 279

About the Website 281

Index 283

DAVID GRAU SR., JD, is the founder and president of FP Transitions, the preeminent consulting firm known as much for building sustainable businesses as selling or merging them at the end of a career. FP Transitions has valued over 8,000 financial services or advisory practices and businesses, and consulted on over 1,500 completed third-party transactions. Grau Sr. previously authored the bestselling Succession Planning for Financial Advisors: Building an Enduring Business, also published by Wiley. He has written 90 nationally published articles, white papers, and manuals on complex succession strategies, equity management, business continuity, income-perpetuation plans, and mergers and acquisitions. Grau Sr. was named one of the most influential people in the profession in an industry survey by Financial Planning magazine and is a nationally recognized expert on succession planning and business-perpetuation strategies in the financial services industry.

The purpose of this book is to help advisors understand how to sell what they've built to someone else for maximum value and at optimum tax rates. It is also written to help those on the other end of the deal, so that buyers may understand how to successfully complete an acquisition on the best possible terms, with minimum risk, while writing off the entire purchase price over time. These are not disparate goals; they are connected in every way and part of a win-win-win strategy that aligns the interests of the buyers, the sellers, and the clients who serve as judge and jury over the entire M&A process. This triple bottom line should be the ultimate goal of every transaction—for the good of this industry, its business owners, and the investing public.

As a seller, you only have one chance to sell a practice you have spent a lifetime building. As a buyer, you're competing with numerous candidates, many with experience and greater resources. To succeed, you need to know more than the other side, and you need an experienced guide. Buying, Selling & Valuing Financial Practices is the complete guidebook for executing your transaction.

Written for sellers and buyers alike, this explicit and detailed road map from a pioneer in the financial advisory profession takes you through the entire process and fully prepares you to maximize your opportunities and avoid costly mistakes.