First-Time Buyers Series: Rookie Mistakes That Can Cost You Big #1

In last week’s article, “The Empathetic Buyer,” we discussed how an advisor-buyer can literally kill a deal by not being sensitive to and respectful of the emotional issues that a seller is experiencing. Today, we will look at a rookie mistake that we have seen in our consulting practice, made by some very intelligent advisors before they ever get the chance to negotiate. These mistakes can cost the advisor thousands, if not hundreds of thousands of dollars.

Suppose you meet a married couple at a gathering and learn they have substantial investable assets, but that is all you learn. You invite the couple for coffee the next day and as soon as you sit down one of them asks, “So what should I do with my investments?” Do you dive in and proceed to tell them how you would allocate their assets, or do you begin asking pertinent questions to get a clear picture before you start making suggestions? The answer is obvious, right?

Now picture this alarmingly common occurrence. An advisor-buyer sits down with an aging advisor who has indicated that she is interested in selling her practice. Without any substantive information about the practice or the clients in their book of relationships, the advisor begins outlining on the back of a napkin, how he might structure the deal. He might even talk about how much money he would put down at the Closing. When you read it this way, it sounds imprudent at the very least. We have observed very bright, successful advisors do just this in an effort to establish a relationship with the seller, or to try to get their attention. Here is a clue, if the advisor tries to take that napkin with her, don’t let her take it! As far as she is concerned, you just made your first offer!

I know, the advisor was just trying to find common ground and he was thinking out loud. It is easy to fall into this trap. You are having a friendly first meeting and you are getting along. Speculating on structure based on what you are hearing seems like a good way to advance the conversation. The advisor figures that he will complete his due diligence and then see if what he initially suggested makes sense. Too late! If what he said sounded good to the seller, anything short of that will be disappointing. If what he outlined does not sound good, he has just blown his first impression. He loses either way.

The seller would have a great deal more respect for a potential buyer who indicated that he had to complete his due diligence before he started making offers. He could talk about the different ways that practices are purchased, but the minute he commits one to paper, even a napkin, he is headed down the road to ruin. If he wants to make a good impression, he should ask a lot of questions and start talking about her practice and why she is considering selling. He could even talk about his own practice and why he feels he is ready to buy and service additional client relationships. Speculative ideas are equally unfair to the seller and the buyer.

This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week. Next, Rookie Mistakes That Can Cost You Big, # 2