The fundamental question for a buyer is about what they’re going to do when they become the owner of the business.Dilok Klaisataporn/iStockPhoto / Getty Images
Good morning. I write Globe Advisor’s Buy the Book column that profiles an advisor’s experiences with acquiring a book of business. This week’s column features former tax and estate planning expert Frank Di Pietro’s journey to becoming an advisor.
Now for an expert’s opinion on how the book-buying process can go awry. Joe Millott, partner at Fort Capital Partners, compares buying and selling books to an auction process.
While it’s not shocking that the highest bidder usually wins in getting the book, the buyer may overlook faults with the business, he says.
Mr. Millott will speak further about the subject during a panel discussion I’m moderating at the Globe’s Wealth Leadership Forum on June 8.
What do sellers miss when thinking about succession planning?
Advisors need to be thinking about succession planning in two phases. First is the succession of day-to-day responsibilities and requirements of serving clients. But succession is also about ownership. And those two things don’t always correlate to the same outcome.
What’s a big mistake buyers make with price negotiation?
Sometimes, a buyer just pays whatever the seller wants because they feel like they’re going to lose the business if they negotiate. But the more fundamental question for a buyer is not about price. It’s about what they’re going to do when they become the owner of the business. It doesn’t matter what the business has done in the past. It matters much more what they’re going to do with it in the future.
If they’re financing the purchase with debt, the return has to be greater than the cost of your capital. In terms of the capital cost, most buyers are paying somewhere between 7 and 9 per cent with interest rates where they are today. So, the advisor has to be earning more than that.
Some new advisors who acquire books experience buyer’s remorse. Why?
Buyers need to ask themselves the critical question: ‘Why am I the person who’s being identified to buy this business?’ They may be identified as a buyer because they don’t have the experience. And because of that, they may overlook certain things that more experienced buyers have considered and passed on.
What’s an example of a good buyer purchase?
Specialty markets. If the seller is working with lots of doctors and dentists and you, as a buyer, already serve that market, buying that book is going to help you demonstrate you’re a specialist. That’s also going to help you with more referrals from that community.
What’s an example of a bad buyer purchase?
We were helping somebody with a possible acquisition. The seller had grown their client base by presenting financial education sessions to provincial government employees and had an in with some provincial government decision makers. The buyer was not going to get any of those decision makers passed down to them.
If you’re using past performance around growth to imply what the future might look like, and if you’re not inheriting all the intellectual property – the centres of influence that are bringing in new business – then you can’t assume the growth they’ve experienced is going to carry over. We advised the buyer not to move ahead.
What industry trends are you seeing today?
It’s really hard to get into the industry if you can’t buy a book or if you’re not willing to take five to 10 years building a book from scratch. Gen Z doesn’t have the money to go onto a grid-based model. The industry is shifting much more toward salary-plus-bonus as an entry point, and maybe even a long-term pathway, for many advisors.
The other issue when you’re building a book from scratch is that a lot of clients end up being mass affluent and not high net worth. For some advisors, that’s just not interesting work. There’s not enough complexity in the mass affluent. They don’t have the financial planning and estate planning needs, and most advisors got into the industry to work on those things.
This interview has been edited and condensed.
Must reads
Proposals to incorporate: Julie Gallagher, the new head of Richardson Wealth Ltd., says regulatory proposals are needed to allow investment advisors to incorporate, as mutual fund advisors already can, to move forward. Rudy Mezzetta reports.
Advisor audits: Facing an audit or inquiry from the Canada Revenue Agency can be a stressful experience for clients. But sometimes, advisors themselves face the same ordeal. Read more about how two advisors fared.
Managing tax instalments: Many self-employed Canadians will scramble to come up with their quarterly tax instalment payments. Advisors help affected clients with proactive planning and budgeting. Alison MacAlpine explains.
More from The Globe
When underinsurance becomes a $54,000 mistake: Underinsurance has become more prevalent as Canadians struggle with higher inflation and affordability. John Shmuel explains strategies to avoid these sticky situations with clients.
Amending a filed tax return: Discovered a mistake after filing a tax return, or disagree with the Canada Revenue Agency over an assessment? Here’s how to file an adjustment, objection or appeal.
The paycheque paradox: Purchasing power isn’t simply about how many groceries you can buy with your paycheque. It’s also about how much wealth a person can accumulate to buffer against future uncertainty and to preserve the freedom to make consequential choices. Hanif Bayat has more.