SEATTLE -- Finding the right "fit," is the single most important factor in successfully buying or selling a financial planning practice, says a consultant who works with planners looking for a deal.

"Fit is everything," says Brad Bueermann, CEO of FP Transitions of Lake Oswego, Ore., while speaking at the FPA's annual conference. "The buyer and seller should have similar philosophies and a similar approach. That's the number-one concern."

While finding that fit is at the top of Bueermann's list, there are other factors that can also contribute to the success or failure of a merger or practice acquisition.


"Don't find a potential deal and rush to the altar," Bueermann says. "You need a number of things in place first: a mutual nondisclosure agreement, third-party valuation, a letter of intent, and a financial and demographic review."

There are lots of potential deals out there. "The current buyer/seller ratio is something like 50:1, so remember that there are other possible buyers. And as a buyer, what can you do for the clients? If you can't define that, the transaction is doomed," Bueermann says.

Those who feel it's important to buy or sell immediately are probably wrong, he adds. "There's no point in listening to noise. I think this is a steady and mature market." Even in 2008 and 2009, demand for quality financial planning practices stayed strong, he says.

After determining the right fit, it's best to establish valuation next, Bueermann says, and then set it aside to work on other details in a potential deal. A valuation that leaves both sides happy is crucial. "People have to leave the closing table as friends, or at least as working partners—the client transition depends on it," he says.

To determine a value that’s fair to both sides, Bueermann recommends against defining value as a simple multiple of a firm's annual revenue or assets under management. Instead, he says, buyers and sellers should consider cash flow, concentration risk, demographics, the firm's expense ratio, and whether the practice's compensation structure is sustainable.


Both sides also should consider transition risk.

"This is what keeps the buyer awake at night, so if you're buying, you need to be keenly aware of this," Bueermann says. "How many of the clients will transfer to the new entity? That number could be as low as 65 to 70 percent, which could wreck the economics of the purchase. In a well-matched purchase, the numbers should be around 97 to 98 percent."

Bueermann adds that market place demand should be examined. "What have you built and where have you built it?" Bueermann asks. A practice built in a wealthy area and filled with well-heeled clients is worth more than one in a less-wealthy area that serves clients with moderate incomes.

If a financial planning practice occupies a market niche, is it a market niche that contains many other planners, some of whom might be interested in purchasing the firm? Or is the list of potential buyers limited, because so few other planners understand and can work in that market niche?

Once both sides of a deal are satisfied, Bueermann says that bank financing, including loans backed by the Small Business Administration, are often a financing option when practices change hands.

Ingrid Case, a Financial Planning contributing writer in Minneapolis, is a former editor at Bloomberg News and author of Your Own Two Feet (and How to Stand on Them): Surviving and Thriving After Graduation.

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