What to know before you buy a book of business from a financial advisor

Disclaimer: This article discusses purchasing a book of business.  It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.

If you’re a newer financial advisor, you might consider purchasing a retiring advisor’s business. This can be a strategic way to grow your business, but before you buy a financial advisor book of business, there are some factors to consider. 

For example, you want to ensure that you can handle new clients without sacrificing your current client base. You’ll also want to ensure that it’s the right fit for you and that you have the cash flow to afford the purchase price. 

Most importantly, you’ll want to make sure that the transaction is set up properly and that you do your due diligence first. In this article, we will discuss what factors you need to consider. However, each transaction is unique, which is why you’ll want to contact our team and discuss the details specific to your purchase. 

Why a book of business acquisition is unique

If you’re a financial advisor and find a book of business for sale, you should know that it is significantly different than other business purchases. For example, let’s say you were buying a cafe. That business has tangible assets, such as equipment and merchandise, which can be easily valued and assessed. 

Buying another advisor’s financial practice does not have that. It is primarily composed of intangible assets, such as client relationships and revenue streams.

This raises many questions, including:

• How do you assign value to intangible assets like client relationships and revenue streams?
• How will you transition into this business? Will there be a succession plan?
• What will the role of the selling advisor be after the transaction? 

Many transactions we see lack the legal structure that should be in place. These deals are too large and worth too much to your future to leave to chance. Understanding these differences is crucial not only to acquiring the business but also to successfully integrating it into your current practice.

Is it a share purchase or an asset purchase (or both)? 

This is one of the most important questions you’ll need to answer, and you’ll want to make sure that what you purchase matches what you expect to get. 

First, what’s the difference? Share purchases involve acquiring ownership of the seller’s company, including all assets and liabilities. On the other hand, asset purchases entail acquiring specific business assets, such as client lists and contracts, while leaving liabilities behind. 

Many believe that a corporation owns a book of business and that a share purchase will entitle them to it. In many cases, this is not true, at least not without careful planning. 

CIRO (the Canadian Investment Regulatory Organization) does not currently allow corporations to receive the income stream generated by investment portfolios. It must be paid to a person, the licensee, who owns those revenue rights. Therefore, a purchase of the shares of a corporation would not entitle the buyer to receive that income stream. 

There are some strategies that can be implemented, but the vast majority of sellers have not done the years of foundational work and planning needed to make them possible. 

Should you require a valuation on the book of business? 

Short answer: yes. Let’s explain why. 

A comprehensive valuation provides insights into what you’re purchasing. These transactions involve a lot of money – you are buying a business! – and you want to make sure that the book is worth it. 

This can also impact your tax bill at the end of the year. Your taxes will be based on the value of the transaction. If you have overpaid for another financial advisor’s book of business, you are still on the hook for that tax bill. 

At Beeksma Law, we are connected with experienced business valuation professionals who can help you determine what this business is worth. 

Is there a transition plan after you buy a book of business?

The deal is not over once the transaction closes. 

You must consider a transition plan to integrate new clients into your existing business seamlessly. A well-thought-out plan will outline the steps and timelines for integrating the acquired business. It will also lay out client communications, integrating staff and technology and how the seller will support the buyer during the handover period. 

Communication is crucial; spelling out these plans within your agreement will prevent many headaches. 

Beeksma Law: Specialized legal advice for financial advisors 

Many clients I speak to about this type of transaction are unaware of the legal complexities involved in purchasing a book of business. However, at Beeksma Law, we have handled these transactions for many professionals in the financial services industry. We are happy to offer comprehensive legal services tailored to your unique needs. 

From structuring the transaction, negotiating and drafting the agreements and navigating regulatory requirements, we can help you start the next chapter of your business on the right foot. 

Reach out to our team today to learn more.