Practice Management

Buying a Practice: Due Diligence Questions

Once you have identified a potential firm to buy, you should evaluate the following key considerations.Working to gather the following information about the target firm will save time for both you and your target firm during the diligence process and will help to ensure you get the maximum value out of the transaction.

Target Firm Data

1)Assets under management. Ask for both total AUM, as well as fee-based AUM.

2)Business/entity structure. Review the corporate structure and organization of the business.

  • What is the ideal size / type of a business you are looking to purchase?
  • Is the business a solo, silo, or ensemble?
  • Are there multiple owners / partners that need to be considered?
  • Does the existing firm owner have the same licensing and credentials?
  • Will/should you need to take on seller’s staff or assume existing lease?

3)Broker-dealer affiliation and account composition. Review the broker-dealer affiliation and any related restrictions related to products, accounts, etc. Review the composition of accounts.

  • Will the buyer’s broker-dealer affiliation help or hurt the sale?
  • How are accounts positioned (i.e., A shares, C shares, advisory, etc.)?
  • Does the broker-dealer have selling agreements in place for products held by existing clients?
  • Is there an account minimum in place?

4)Investment and financial planning approaches. Review the approaches and philosophy towards investments and financial planning to make sure both are in line with yours

5)Services overview. View a documented service offering and model to understand what is provided and to whom.

  • Does the advisor have the same client relationship philosophy?
  • Are there services/advice being offered that you do not currently provide?

6)Fee structure.Review the pricing structure (i.e., what fees are being charged, how they are being charged) and its alignment with your current pricing structure.

  • What is the existing fee structure?
  • How does it compare to your fee structure? To industry averages?
  • Are there planning or retainer fees in place?

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Practice Management

7)Operational efficiency. Review the technology, outsourcing and established process solutions that the firm has in place to help drive operational efficiency and consistency. In the case of technological solutions, consider how the existing technology will interface, coordinate or be replaced by your current technology.

  • Does the firm have a repository of documented procedures or operations manuals?
  • Does the firm leverage a CRM system for client tracking/communication?
  • Does the firm leverage planning software?

8)Geographic exposure. Note the number of and exact location of current clients outside your general geographic area (i.e., more than 30 miles from your office location).

9)Client base. Review the demographics of the client base and consider how many clients you can reasonably accommodate with your current resources.Request data (averages if individualized data is not available) for current clients for the following metrics to compare how they relate to your ideal client:

  • AUM
  • Annualized revenue
  • Age
  • Length of time with firm
  • Concentration (i.e., how many clients at given AUM levels)

Note. You should review this data forall clients, as well as by client segment/tier.

10)Referrals and professional partnerships. Request information on the current referral stream, as well as specifics about center of influence and strategic partnership relationships.

  • What are the average referrals each year and the sources of each?
  • What is the exact number of referrals in the past 12 months?
  • Are there key strategic partnerships that will continue after the purchase?
  • Are there any revenue sharing agreements with other professionals or centers of influence? If so, what will be the arrangement after sale?

Deal Structure Considerations

1)Is the seller committed to selling?

2)What does the seller’s ideal acquisition look like?

  • Can the seller give specifics as to what they are looking for in a business to sell to?

3)Is the seller’s time-table the same as yours?

4)What is the expected deal structure (i.e., down payment, seller-financed note, earn-out)? This drives:

  • What is paid up front vs. over time
  • What is guaranteed or not
  • Whether the purchase price is adjusted up or down with client/assets attrition or changes in the market
  • What the earn-out depends on (revenue is the traditional method)

5)How is the sale handled?

  • Seller departs immediately or remains for some period of time?
  • Seller assists in client meeting and with the transition?
  • Role and responsibilities after the deal? Is it part of the deal or tied to a consulting agreement?
  • What will the seller do to facilitate the transfer of client relationships?

6)How is the value determined?

  • Revenue, cash flow, other?
  • The period used (i.e., trailing 12 months, average of last 3 years, etc.)
  • The multiple used and how the multiple is determined
  • Does the buyer’s notion of practice value fit within my parameters?

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