Succession Planning: Buy/Sell Practice

How does one actually finance the purchase of a book of business? I’m assuming you put a cash down payment...how much? Does a bank finance the rest, or your BD?

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Down payment from the buyer isn’t always required, depends on the metrics of the deal. In many cases the buyer will be able to finance 100% of the purchase price. For independent advisors, bank financing has become the norm in the last 48 months, for employee channel advisors, you’ll use the existing sunset program at your BD.

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Seller notes are becoming less common now that there are a handful of reliable banks that specialize in our industry. Advisors licensed with FINRA are capped at 5 years of payments to the seller after the seller has retired (per no action letters related to rule IM 2420-2), and the banks will finance the deal over 10 years, so most buyers we are working with are gravitating towards all cash deals financed by the bank. Benefit is - cash flow is greater in the early years and in most cases, the buyer does not have to bring any cash to close. This applies to independent advisors only obviously, since employee advisors don’t have the ability to truly buy/sell.

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Yes, David said more succinctly what I was trying to say, which makes sense because I reference a lot of his material when talking about the topic of succession planning

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FP1, which BD are you with? Jones is 50% for 2 years, granted you’re lucky enough to get one (gotta be new or existing professional coming from another firm), and cannot purchase books period

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I’m doing one now. 2 1/2 years into a four-year deal. We did a straight cash flow buy out with no upfront payment. But I structured mind where I gave him 25% above market value for a 100% brokerage book that I knew I could transition over to advisory over time. That was for two purposes. One was to keep him around so that he would stay the face of the business until I had all the relationships over the four years not just all of the accounts. And secondly was to avoid having to front a lot of money. But this was all internal and the accounts all came over to me in one fell swoop. His trails more than finance the cash flow payments and thus the profit above that was already built-in, before transitioning into advisory which we’ve done a lot of as well. Northwestern mutual doesn’t get involved in how you do it and they don’t place any restrictions on how we finance it or how we structure it.

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Definitely it’s very much you do what you decide to do once you make it past the initial hurdle requirements in the earlier years. You’ve got a lot of control and autonomy

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At this point - we have around 10 reliable banks we work with to finance purchases, and most will do 100% financed, usually around 6.0%-7.5% interest on a ten year term (rate varies based on deal size and buyer). The key is to know which lender is right for your deal. They will all say “yes”, but each has a unique “credit box” and you want to be in the sweet spot or your interest rate and process will be terrible, and you may not make it through underwriting...call any time and we can provide some guidance.

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How long does it take to “break even"

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Yes, there is typically a cash down requirement. According to Cerulli studies, 25-30% is about the range for down payment. The remaining 70-75% is a combo of payout to seller via loan (reduces seller’s risk) and seller note (keeps seller’s skin in the game). All of this can be 100% financed so buyer does not have to come out-of-pocket with a, usually, large down payment

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Also, my question is do you have to put a cash down payment when purchasing? Say, 20% or so...

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For an internal transfer, my BD allows for 50% of the fees from the purchased book (including new sales) to be paid to the retiring advisor for 5 years. Only caveat is both advisors must be at firm 3 years. On outside purchases, I look for seller financing with perhaps an upfront loan from bank.

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Build a war chest... link up with one of several firms that provide FA purchase financing... have the principal hold somepaper so they have skin in the game for a successful transition... remember it's a sellers market

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