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, based on whether it is transactional or recurring. There is little credit given to the intangibles of an advisor’s practice.
It is a paradox to what 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, we focus on cash flow and the likely percentage of transition of clients and assets, more than on the value-added characteristics.
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 their destiny and build something based on their vision and belief system, vanishes with one stroke of the pen. For the advisor with little or no future plans for retirement, this can be both depressing and downright frightening. By the way, “my spouse wants to travel,” does not pack the positive punch it takes to mitigate these feelings.
This dynamic sets up a situation in which an advisor-buyer who is not willing to be sympathetic 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.
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. 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 breakdown in communication, and even trust between buyer and seller. Think, “walking on eggshells.”
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. 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.