5-Steps to Buying a Book of Business for First Time Buyers

26th March 2018
If you're relatively new to the industry, there are two ways to grow your business:
  1. You can increase your production thereby expanding your customer base. 
  2. Or you can grow your practice by acquiring another book of business.  In fact, given the average age of an insurance and investment advisor is 59, there’s likely a senior practice owner who’s looking for someone just like you.
Kickstart Your Growth
Growing your book inorganically through acquisition typically involves startup costs.  However, if done right it can present less overall risk than acquiring clients on your own. Take your financial model for instance, you’re going to be evaluating historical profit and loss records as opposed to your hypothesized estimates for growth.  If you’re newer to the business, you may not have built up enough data to determine how accurate your estimates are.  Moreover, if you put a solid communication plan in place for existing customers, the practice owner you succeed may be able to impart valuable goodwill, and you’ll have the opportunity to set an exciting new course for a once static practice.
What motivates sellers?
 When a seller decides it’s time to move on, it doesn’t mean there’s anything wrong with their practice.  The misconception that the financials must be in a poor state, or that there’s no opportunities left is a big misconception.
The fact of the matter is, practice owners look to sell their practices for a number of reasons.  Whether they’ve decided to move on because they’re clearly slowing down and unable to service their clients at the same rate they once could, or are simply moving on to the next chapter in their lives, many of these businesses still have plenty of enduring business value and have exciting opportunities waiting to be mined.
Whatever the case may be, it’s not an easy decision.  A decision made that much more complicated by having to find the correct buyer who’s as equally enthusiastic about the existing client base as he or she is competent with the business.  A successor who they feel will comfortably be able to take the practice to new heights while respecting a lifetime of investments made into relationships with clients they now consider family.

Getting started

 Here are some things first time buyers should consider if you’d like to set yourself up as an acquirer of a practice and putting yourself on a trajectory for growth:

1. Establish your purchasing criteria

Acquiring a business is a huge decision. It’s likely one of the biggest purchases you’re going to make; it will impact your life and livelihood for many years to come. So before you even start investigating options, start by knowing exactly what kind of business you’re looking for. Here are a few factors to consider:
  • Proximity: What’s the maximum distance you are willing to go to service clients?  Do they need to be close to your existing client base, or are you willing to travel?  Are you at a life stage where, for the right practice, you’d be willing to move?  Don’t forget the old adage “location, location, location”.  Not only will it affect you personally, but you should also consider how much staff in the area might cost, the demographics of the practice, taxes, and anything else that might impact your bottom line.
  • Size & Makeup: Are you looking to purchase a small block with a handful of professional, high net worth clients?  Or do you prefer a large number of kitchen table clients with up-sell potential? Carefully understanding what type of practitioner you are will dictate the type of practice you buy and will also influence the cost.  Buying a practice simply to add more clients to your book can actually have negative repercussions.
  • Reputation: You certainly wouldn’t want to buy a list of dissatisfied clients, or a book from a practitioner that has had fines levied against him or her.  Do your homework (there are online resources to help support this fact finding) and when you're ready to take the next step, seek testimonials from the owner's existing client base.

2. Find the right match

It's tempting, but don't start Googling for practices that might be up for sale.  Instead, attempt to put the word out amongst your peers.  Could one of your mentors be ready to move on?  Have you teamed with a producer in the past who might be willing to sell?  Do you know anyone who has purchased a book in the past and hasn’t been able to service that market and might be willing to part ways with those clients?  If there’s a practice owner whose business you’ve admired over the past years and wished you’d owned, buy them a cup of coffee and ask what their transition plan might look like.  There’s no harm in asking.
Once you’ve exhausted your close relations, it’s time to hit up your network.  Look for 2nd degree connections on LinkedIn, or check out reputable peer-to-peer marketplaces for practitioners like FindBob.
Click to Find a Book of Business!

3. Do your homework.

Think you’ve found the perfect match?  It’s awful tempting to jump in and purchase the practice and keep things moving forward.  However, be sure to do your due diligence. Remember one man’s treasure is another man’s poison.  It might appear great and the owner might be saying all the right things, but there could be important issues lingering that would make it a poor fit for both parties.
Look into getting an independent valuation on the target practice done by a professional valuator.  The valuation won’t just help you determine the current worth, but help identify any future opportunities within the book of business as well.
If you’ve never negotiated the terms of a sale previously, you’ll want to consider enlisting the help of a business broker.  Recognize though that many of these brokers work in much the same manner as real estate agents and will charge up to 10% in commissions from the purchase price.
Lastly, you'll most certainly want to consult a professional accountant to review the owner’s financials to make certain all is as advertised.
If you’re aligned with a home office, reach out to them to see if they can offer support in any of these areas.  Not only will it reduce costs, but they’ll likely have your best interests in mind when consulting you on these matters.

4. Get funded

Compared to building a book yourself, purchasing an existing practice can be an expensive proposition.  Most purchasers will require funding in order to get the deal done.
Below are two common approaches to financing.  You’ll need to weigh the advantages and disadvantages of each and take into consideration the impact on your bottom line:
  • Practice acquisition loan: Taking out a term loan from a financial institution to pay for the business is a common option.  There are lenders who specialize in practice acquisitions that understand the unique dynamics of financial practices. Alternatively, your home office may have a business acquisition program to help you out.  Regardless of where you get the loan from, your personal financials and those of the target practice will likely play a large role in your ability to get financed.
  • Seller financing: Perhaps the best financial choice if the seller is open to this scenario.  Seller financing allows you to make payments over time to purchase the business, usually for the purchase price plus interest.

5. Make it written and actionable

Now that we’ve found the perfect practice, agreed upon the terms, and where the money is going to come from the last and most important step is to draft the agreement.  Don’t put all that effort into getting to this point and not consult a a lawyer proficient in business acquisitions.  Again, your home office might be able to give you a good referral. That individual will help demystify and ensure you’re getting the best terms for both parties and ensure there is no ambiguity post-transaction.
Making the choice to buy a book of business can be an exciting way to fuel your growth and make a lasting impact on the lives of the customers you’re set to inherit.  With the right match, and by working diligently on the transition, you might be able to turn an existing business model into an enduring and valuable part of your business for all stakeholders.
Click to Find a Book of Business!