Financial Advisors: You need to know these pitfalls before buying and selling a book of business!
Disclaimer: This article discusses buying and selling 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.
When it comes to any transaction, several cliches apply. To be forewarned is to be forearmed. You don’t want to be penny-wise and pound-foolish. Haste makes waste, and you should look before you leap.
This is especially true when it comes to buying and selling a book of business.
We’ve worked with a number of clients who are thinking about succession planning. They may be considering retirement or want to transfer their practice for other reasons. We’ve also worked with newer advisors who wish to gain additional clients by buying a book of business from another advisor.
In both instances, we find many advisors do not fully realize how complex these transactions truly are. Over the course of handling these purchases and sales, we have noticed some common pitfalls. In this article, we will explore these challenges and share how you can avoid them.
Pitfall #1: Failing to Understand Asset vs. Share Deals
Choosing between a share or asset purchase is crucial when buying a book of business, as it impacts what you acquire, the liabilities you assume, and the tax implications for both parties.
Share Purchases involve buying the seller’s company, including all its assets and liabilities. While many believe purchasing shares automatically grants them rights to the book of business and its income stream, this is not always true. For tax reasons, sellers often prefer share deals, as they may benefit from capital gains tax treatment.
On the other hand, asset purchases involve acquiring specific business assets, such as client lists and contracts, while leaving liabilities with the seller. Buyers generally prefer asset deals because they can selectively acquire assets and often benefit from tax deductions like depreciation. This option provides more flexibility and a cleaner transfer for the buyer.
Under CIRO (the Canadian Investment Regulatory Organization) regulations, corporations cannot receive income from investment portfolios; it must go to the individual licensee who owns the revenue rights. With these resitrctions in mind, obtaining an income stream through a share purchase requires careful, long-term planning and specific strategies, which many sellers have not implemented.
You must understand these distinctions to align the transaction with your expectations.
Pitfall #2: Not doing your due diligence before buying a book of business
Thorough due diligence is essential when buying a book of business to avoid hidden risks and liabilities. After all, this is a large transaction that will impact your business for years to come.
Do you really understand the value of what you are purchasing? Are you paying top dollar for a book that is worth less?
Will the seller be involved in the transition process? How will you handle client communication?
Understanding the cultural and strategic fit is also vital to ensure smooth integration and retention. Without proper due diligence, buyers risk overpaying or facing unexpected challenges that could impact profitability.
To protect your investment, work with experienced advisors to navigate the complexities of the process.
Pitfall #3: Waiting to see what CIRO will do before your sell your book of business
While the CIRO has indicated that it is considering changes to its regulations, you do not want to hinge major business decisions on what they might do. Regulatory bodies can take years to implement changes, and waiting for approval could mean missing out on immediate opportunities. Instead, both buyers and sellers should focus on what they can control.
If you plan to sell your business book in the next few years, it’s time to start preparing now. This includes structuring your business to make future sales possible, consulting with legal and financial advisors, and understanding the tax implications.
Pitfall #4: Not Speaking with an Expert to Navigate Your Options
Navigating the sale or purchase of a book of business can be a complex and nuanced process that requires careful consideration of tax implications, deal structures, and potential regulatory changes. At Beeksma Law, we have experience helping financial advisors plan strategically for both buying and selling their businesses.
If you are thinking about selling your book of business or are interested in exploring your buying options, reach out to us today to discuss how we can assist you. Our team can help set up the necessary structures and provide guidance to ensure you’re well-prepared, regardless of what the regulatory landscape looks like in the future. We also partner with other professionals, such as valuators, to make sure that you’re making informed choices about your business.
Beeksma Law: Focused Services for Financial Advisors
At Beeksma Law, we have guided financial advisors through the complexities of buying or selling a book of business. THis includes navigating regulatory challenges, conducting thorough due diligence, and structuring deals to optimize tax and financial outcomes.
Whether you are preparing to sell, looking to expand through acquisition, or need to understand evolving regulations from CIRO or other regulatory bodies, our team provides tailored legal solutions to meet your specific needs. Reach out to us today to learn how we can help you protect your interests and achieve your business goals in the financial services industry.