While buyer activity levels will always fluctuate due to a myriad of factors such as the economy, industry reforms, changing regulatory conditions and seasonality, there are also some clear consistencies when it comes to buyers’ behaviour and sentiment. The best way for me to explain this is to share the two questions I ask every buyer I meet and the responses I hear back time and time again. The first question I ask is….
‘What are your reasons for wanting to buy a business?’
For the most part, the buyers I speak with are buying a business for growth. They are practice owners who want to accelerate revenues and grow their number of clients. Often they currently manage a successful existing practice, however the rate of organic business growth is slower than required to meet their personal and business objectives. So, after evaluating the strategies and investment required for organic growth against the alternative of acquisitive growth, they arrive at the decision to ‘buy growth’ rather than nurture or farm it.
The reason behind this – IMHO – is that while highly skilled at providing financial advice, very few financial planning practices are proficient at marketing. Marketing is critical for growth as it drives awareness, builds reputation and credibility, identifies and nurtures leads and ultimately (if done right) delivers new business opportunities via inbound lead inquiries. You don’t make this happen overnight, it takes time and effort and in the absence of any marketing activity the only source of new clients and new business is selling more to your existing client base or hoping for referrals.
The percentage of how much to invest in marketing has been debated since the role of marketing began. And while research will tell you the number range is wide and differs across industries, the general best practice is companies (particularly those who have not done much marketing in the past) should begin with an investment of roughly 10 percent of total revenue per annum. That means if your practice is turning over $1M in revenue, you should be investing $100K on marketing resources and promotion. Similarly, a $5M practice should be investing $500K per annum. There are cost effective ways to market such as digital, social media, email marketing, PR and content marketing that practice owners should evaluate as channels to new business that enable measurement and ROI to ensure your invested budget is ‘working’ for you.
The second question I ask is…
‘What do you find to be the hardest thing about buying a business?’
Consistently I hear that finding the right asset is the most difficult part. This is unsurprising and similar to buying a house or any other high value asset. If you are investing a significant amount of money, you want to ensure you spend your hard earned dollars wisely. This leads to the second biggest challenge buyers face which is receiving the right information from the seller.
Inadequate preparation of the right information by sellers is one of the most common mistakes we see when transactions are taking place. It is also the number one reason practice owners fail to maximise value, minimise transaction risk and transact in less than six months.
Buyers come in a variety of “shapes and sizes”. Some will be interested in understanding or seeing the business differently to the way the seller sees it. In fact, different buyers will have different needs and want to see it differently to the way other buyers want to see it. Sellers will save a lot of time by preparing business data in a way that the majority of buyers will want to view it. It’s not hard if you know what you need – that is to demonstrate to buyers what you do, how you do it, for who and what are the results. The more information the better and I recommend you read an earlier blog I wrote on this topic.
Of course, the final challenge is agreeing the price and terms. More than 50 percent of practice owners tell us that they do not know what their practice is really worth. They hope its value is the top of the range however rarely do they get a valuation. Knowing the value of a business is most often about the circumstances, knowledge and experience of the buyer and the seller alike.
When a practice owner decides it’s time to sell and move on, knowing the value of the practice is critical. It is an essential part of preparation for a sale, merger or succession plan. It’s also why working through a broker can help to manage and simplify often highly emotive and subjective negotiations.
Chris Wrightson. Founder and CEO at Centurion Market Makers, the industry experts in the sale, acquisition and management of financial planning firms. If you’re planning on selling your firm in 2017, we’d love you to call us for a confidential discussion, or continue browsing our website for more tips, tools and info on the steps to take when buying or selling your financial planning firm.
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