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Is Buying a Financial Advisory Firm a Good Way to Start?

Kevin Connor
Jan 17, 2017
At some point in their lives, many employees within the financial industry decide to strike out on their own, leaving the workeday world behind in favor of doing their own thing and making their own way. Whether those financial professionals worked as stockbrokers, technical analysis specialists, mutual fund advisors or financial advisors, they all have a few common goals in mind - they want to make their new venture a success, and they want to avoid the mistakes others have made during the transition from employee to entrepreneur.

When it comes to making that leap, financial industry employees have some options. They can build their firm from the ground up, beating the bushes to find new clients and cold calling prospective customers until they have a going concern. Many successful financial planning and wealth management firms started this way, growing organically and building on their past successes with each passing year.

There is another option for financial industry professionals who want to make the transition from individual employee to business owner a big success. That option involves buying an existing financial advisory firm, and it can be a smart way to start a professional practice.

Build or Buy?

The decision to buy an existing financial advisory firm or build your own is a highly personal one, and no one choice will be right for everyone. Some people thrive on the thrill, and the danger, of building their firm from the ground up, while others prefer the stability, and existing client base, that comes with buying an existing financial advisory firm.

Buying an existing financial advisory firm does have a number of built-in advantages, starting with the existing client base. Having an existing base of clients is certainly a plus, and it provides a sound starting point for the new business owner.

Analyzing Cash Flow and Business Value

There are other potential advantages to buying an existing financial advisory firm, including easier analysis of current cash flow and future earning potential. Knowing how much the firm brings in on an annual basis is certainly a big help when evaluating the cash value of the business, and it provides an excellent place to start the negotiations.

Having some idea of the earning potential of the business can also make tax planning easier. Whether you plan to file a separate business return for your new financial advisory firm or include it on your personal taxes, the cash flow analysis you have done will make your financial planning process a lot easier.

Factors to Consider When Buying an Existing Financial Advisory Firm

As you can see, buying an existing financial advisory firm does have some potential benefits, but there are also some pitfalls to avoid. If your newly purchased business is to be successful, you need to evaluate the practice carefully, gauge the level of client satisfaction and look for red flags that could mean the deal is less than it seems.

One of the most common reasons takeovers of existing practices fail is a disconnect in culture between the old owner and the new one. Every business, no matter how small has its culture, expectations, and way of doing things. Any change of ownership is bound to be frightening for existing staff members, who may feel their jobs are at risk. Failing to assess the current culture and make accommodations could make that trepidation worse or even cause the entire enterprise to fail.

Create a Transition Plan

Creating a detailed takeover plan can ease the minds of current staff members and make the entire takeover process easier. Buying an existing financial advisory firm means you will be starting with a blank slate, and having a plan in place is imperative.

In the beginning, you may be reliant on the expertise and guidance of the current owner, who can help you understand the unique culture of the firm, the expectations of its clients and the financial products and services it offers. As you learn more about the financial advisory firm and how it operates, you can take a more active role and start the transition process in earnest.

By developing a plan for transition and new ownership, you can boost your odds of success while getting to know the men and women you will be working with. At the end of the day, the financial industry is primarily a people business, and maintaining strong relationships with the existing base of clients will be critical to your success.

The people who know those clients best are the staff members who currently work in the financial advisory firm. By relying on their expertise and guidance, you can get your new business off to the best possible start and create a win-win situation for all involved.

Finding the True Value

As the average age of independent financial advisors continues to climb, experts expect more and more advisory firms to hit the market in coming years. Many independent advisors are now reaching their retirement years and using their knowledge and investment acumen to secure their futures.

As those financial advisors look forward to retirement, they will be looking for experienced and competent professionals to serve the needs of their clients and take over operation of the businesses they have so carefully built and nurtured. If you are coming into the market in search of opportunity, you should have no trouble finding existing financial advisory firms for sale.

What will be difficult is determining how much those financial advisory firms are worth. Valuing a business is always a tricky proposition, but it can be even more difficult with a customer-service and people-oriented business like this.

No matter where you are in the process, it is important to utilize online platforms like Truelytics when valuing an existing financial advisory business. You may be an expert at investing and client service, but you are probably not an expert at valuing businesses. With Truelytics, you can make sure the price you pay is a fair one, and that your new firm will get off to the best possible start.

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