The Empathetic Buyer™
Virtually every article one reads about practice management focuses on avoiding your services to clients becoming a commodity. With the advent of robo-advisors and the increasing popularity of passive investment strategies, advisors are told to develop Value Propositions to make their services to clients about more than the numbers. Then when an advisor wants to sell his/her practice, the buyer determines the value of the book on some multiple of revenue or cash flow and based on whether the revenue is transactional or recurring. There is very little credit given to the intangibles of an advisor’s practice until asset levels reach $500 million or more, and even then it is about systems, rather than culture. It is a contradiction to that which the advisor has heard over the last decade or more.
For buyers, an acquisition is almost entirely a financial transaction, as it should be. As a consulting firm, often helping advisors acquire or sell, we focus on cash flow and the likely percentage of transition of clients and assets, more than on the value-added characteristics. With that said, we all should pay close attention to the intangibles of a prospective acquisition, because many of the clients came to this firm due in part to cultural points of difference. In addition, it is critically important to understand the potential seller’s mindset.
For most sellers, the sale represents the culmination of their life’s work, the handing over of their clients and friends to another steward, and a change in their life from trusted advisor, to former trusted advisor. The very state of mind that makes an entrepreneur successful; a desire to control his or her destiny and build something based on his or her vision and belief system, vanishes with one stroke of the pen. A big check, while very nice, rarely eradicates subsequent seller’s remorse. Many sellers tell us that even though they know that a good advisor has purchased their firm and the clients will be well taken care of, a profound feeling of loss creeps up on them that is far more disheartening than they had previously envisioned.
For the advisor with little or no future plans for retirement, this can be both discouraging and downright frightening. By the way, “my spouse wants to travel,” or “I play golf” do not pack the positive punch it takes to mitigate these feelings.
The Empathetic Buyer™
This dynamic sets up a situation in which an advisor-buyer who is not willing to be sympathetic, or at least empathetic, with what the seller is experiencing can easily say the wrong thing at any point along the process. It is not necessarily the buyer’s fault. This is especially true of a first-time buyer. He or she is so focused on getting the numbers right that the feelings of the seller seem to be less consequential to the process. The assumption, often incorrect, is that the seller would not have entered a negotiation if these emotions had not been dealt with.
My personal significant experience with sellers, while anecdotal, is that they have almost never dealt with the reality of these emotions, even if it is clear to them that selling at this time is the right course for them and their family. It is tantamount to losing a spouse. You may have considered how you would feel, but until it actually happens, you cannot really imagine how you will feel or deal with it emotionally. Being in a position of trust from your clients and the inherent feeling it creates when you help one of them is a powerful, seductive drug that it is very difficult to wean yourself from. At the risk of sounding sexist, I have found that this is particularly true of women sellers who are in their 60s and 70s. This has very little to do with a woman’s emotional makeup and a lot to do with what they had to do to be successful in the last 30-40 years. Think about it. In the mid-1970’s and into the 1980’s there were very few truly independent advisors. Of that group, there were even fewer woman advisors. Today among Certified Financial Advisors, (CFP), only about 23% are women. Imagine what that number was in say, 1979! Those who became successful had to fight hard against stereotypes and the “boy’s club” nature of the business. Those who have survived and thrived to today should be celebrated for what they have done for the business as a whole, and for woman advisors in particular. How would you feel if you spent 30 years competing with people who looked at you as a usurper? My point is that all seller-advisors deserve our respect, and particularly those women pioneers in the business.
It is true that the larger the firm or practice you are buying, the more of a business decision, as opposed to emotional one, it becomes for the seller. It makes sense that a firm which has grown to $500 million or $1 billion in assets under management might be run more like a business than a practice. Systems and accountability standards are usually in place that are absent in much smaller firms. These larger firms command higher multiples in today’s marketplace. The advisor will still care about his or her clients and will be proud of what has been built, but there is a good chance that the emotion of the transaction might take a backseat to the pure business metrics of the business and the transaction. Advisors who have spent an entire career, perhaps 30 or 40 years, in the industry and only accumulated say $30 million or less, do so for several reasons. One of those reasons that we see time and time again, is that they have trouble making major decisions with long reaching ramifications. Advisors with $200 million or more in AUM have less trouble making decisions. As a buyer, I personally would much rather work with advisors who can make reasonable informed decisions in a timely fashion. This again argues for books of a little larger asset base. This is not to say that the smaller books are of no value. There are a lot of other and legitimate reasons why a book may be small. My point is to be careful to investigate not just the metrics of the book, but the motivations and mindset of the person selling it.
To add to the emotion that a sale naturally stirs up, consider the advisor who intends to stay on for a few years. Most of our clients want the advisor to stay on for some period of time to help affect the transition, but some advisors want to stay longer to ease their way into retirement. This can be very beneficial to both buyer and seller. However, this creates a scenario in which a former owner, who is used to calling all the shots in his or her firm, and may have never had a partner to consider, is now working side by side with the buyer who is the person in control. If you think former trusted advisor is hard to swallow, try for a month or so being the person formerly in control. Many times, books and practices are financed by SBA Loans, (see a later chapter). To qualify for such a loan, the former owner cannot retain any control or management responsibilities. Both the seller and buyer really have to think about how to treat the seller who stays on and whether he or she will be able to work under those conditions.
It’s Really Happening
In our experience, the most sensitive and dangerous period in the entire acquisition process, is that between the signing of the nonbinding Letter of Intent, (offer letter), and the Closing Date. Once the seller accepts in principle the terms of the LOI, the sale becomes very real for him or her; perhaps for the first time. The fastest way to determine how serious someone is, is by writing it down. Discussion is free-wheeling until someone codifies the points so that both sides can react to the written word.
The emotions discussed above are multiplied exponentially and the likelihood of second guessing, and other forms of “seller’s regret,” rise with it. Do you remember when you were a child on a long car trip and just looking at your brother or sister wrong could start a fight? It only takes one statement to a sensitive seller during this period to cause a serious breakdown in communication, and even trust between buyer and seller. Think, “walking on eggshells.”
Here is an example of a very simple mistake that I saw made today. I was on a call with a seller and a loan broker. We were there to explain a $200,000 difference in a loan that my client was seeking on a deal that would bring the seller $2 million at the Closing. The 71-year old seller was concerned about the difference and the fact that the bank was now asking him to carry the $200k loan to go with the $2.6 million loan that the bank was providing. Ultimately, the seller would still get his money, and overall, it was not a great deal of money, but it was new information to the seller. The loan broker made the comment, “Come on Bill, it’s really not much money.” He did not mean it maliciously, but it was certainly the worst thing that he could have said to the seller at that point in time. You can imagine that the seller’s response was, “It would be, if it was your money!”
Here is another. Two advisors were trying to purchase a third advisor’s business. Both firms did a large percentage of their business in managed accounts but managed the money in a slightly different manner. They each did a version of financial planning that was similar, but again, a tad different. The woman seller asked if she could stay on as a consultant to keep her hand in for a couple of years after the sale, until she turned age 70. Their response to this 40-year veteran of the business was, “Sure, as long as you do it our way.” (Using the name of their firm, as in, “As long as you do it the Casey Corrie way.”) Now there were other ways to get the point across without telling her in so many words that the way she had been doing things for all those years was unacceptable and that perhaps she was not as professional as they were, (which was exactly how she took it). Was she too sensitive? Perhaps, but they needed her on their side during the transaction and the transition. This comment, along with several others, caused her to pull out of the deal, because, she “did not feel she could trust them.” Was she wrong? Possibly, but when you are deciding who is going to service your clients for the future, and in her case, deciding who she would with for a few years, everything they say counts.
I know what you are thinking, “These are adults, why should I walk on eggshells?” “Why do I have to kiss their rear-ends? It is a business decision, nothing more.” I am here to tell you that it is more than that to a seller and the moment you forget that, or chose to forget it, you jeopardize your chances of success.
In a competitive seller’s market, such as exists today, it is important to be an attractive buyer. Paying attention to the seller’s feelings is just as important as the numbers. Some studies indicate that for most sellers, the transaction is 60%-70% emotional, and only 30%-40% financial. The more you are perceived to understand the seller’s emotions, (or at least that you are attempting to understand), the more attractive you become as a buyer.
This all may sound like common sense. One should be sensitive to the feelings of the person you are negotiating with. We have seen buyers spend hours working and reworking the numbers, meeting with bankers, only to blow the deal by making the seller feel as though he or she is less important than the numbers. It’s a rookie mistake. Bottom line, if you are purely a numbers person, find someone on your team or an outside consultant, who can stand between you and the seller to make sure you are being duly sensitive to what they have accomplished and the emotions that the seller is almost definitely experiencing. A first-time buyer can make a lot of mistakes. This one is to be avoided at all costs. It can literally be the difference between success and failure.
One of our clients, Keith, is a very good advisor and business man. He is great with clients, but he is rough around the edges when he is negotiating. He “thinks out loud” sometimes and speaks in a way that can seem insensitive. Those that know him are aware that he genuinely cares about people, but he can easily come off otherwise. Keith was smart and self-aware enough to know that this characteristic could get him in trouble with a sensitive seller. So, he did two things. First, he let me do most of the communication with the seller. Second, when it was important to discuss sensitive issues with the potential seller, he asked his partner, Linda, a woman with excellent communication skills to handle it. We had a few speed bumps, but ultimately the strategy worked.
As a consultant, I have often played the role of buffer or the target of a seller’s anger. In some cases, buyers and seller’s look at me as someone they can try ideas out before they present them to the principle in the transaction, because they know that anything I say, must later be approved by another party. In a few circumstances, I have been the buffer for the seller’s anger. Anything controversial gets presented by me. That way the seller can explode, (oh yes, some do!), and get it out of their system and then we work it out without both sides creating an adversarial relationship. The advice here is to either find a consultant or someone in your firm to help, if you do not believe you can play the role of Empathetic Buyer.