Things To Avoid Buying A Practice by Totus44669999


									10 Things to Do or Avoid When Buying a Prac tice
Written by: David J. Drucker

Would-be buyers can improve their chances dramatically by paying attention to some common-sense rules of thumb.
Buying and selling financial advisory practices is big business today, thanks to Business Transitions, the company founded by its President, David Grau, and Chief Financial Officer Bill Grable, CPA. Grau and Grable have now accumulated four years of experience helping both buyers and sellers transition practices. As such, they’ve seen a lot of smoothly-executed deals, as well as, let’s say, more “problematic” deals, come across their table.

But the most common problems occur not in the deal-making, per se, but in the proposals buyers make to sellers. It’s probably good that things happen this way since there are 30 to 40 potential buyers for every seller that posts a listing on Business Transitions’ various sites, reports Grau. In other words, problematic pitches give sellers a basis for weeding out the excess buyers. That may be capitalism at its best, but it has got to be frustrating for those buyers! So, if you’re seeking to buy a practice on one of Business Transitions’ sites (or competing for a practice in any venue), how can you make a great showing -- enough so to convince a seller that he needs to talk to you? Let’s say you’re looking through the listings at of practices for sale. What you do next will determine whether or not you get your foot in the door. 1. Don’t be too picky. Understand that there are no perfect matches. Try to figure out how those practices that come closest to meeting your criteria can be adapted to your vision of growth via acquisition. 2. Come across as a winner in the way you respond to listings. “Everything about your response should exude a confidence that tells that seller you are the buyer that can make the deal work,” says Grable. Talk about how you will absorb the clients into your system of operation. Talk about your excess capacity and

excellent personnel. But be mindful of the seller’s possible desire to keep jobs for his own key personnel. Can you assure the seller that whomever he wants to keep on will have a place with you in the “new regime”? 3. Treat your response as a formal business communication. Terrible grammar, punctuation, and an incoherent writing style will sink you. These detract from the impression that you can successfully consummate what may be the most important deal the seller has ever embarked on in his entire career. An informal or sloppy first impression won’t even get you into the recycle bin for a second look.



10 Things to Do or Avoid When Buying a Practice

Says Grable, “Poor grammar comes across as coarse and even arrogant. A sloppy response screams, ‘I’m doing you a favor even taking the time to respond to your listing.’ Sellers will shudder at the prospect of a ‘heathen’ like you sending a letter of introduction to their clients.” 4. Make yourself attractive to the seller in more ways than just the price you offer. Don’t make the mistake of thinking that money is all that’s on the seller’s mind. You must convince the seller that you are a great match for him and his clients in terms of both your personality and your business/planning philosophy. Many sellers are as concerned, or even more concerned in some cases, with their legacy to their clients, as they are with their economic well-being. 5. Know when to stop selling. Advises Grable, “Once you’ve convinced the seller you’re a good match, don’t keep selling yourself. There’s a fine art to knowing when you need to stop philosophizing and start talking about the money.” 6. Conduct all of your interactions with the seller with politeness and respect. What will hopefully become a serious negotiation shouldn’t start out from an attitude of mistrust or a show of theatrics. And, believe it or not, many buyers are eliminated solely on the lack of politeness they show sellers’ receptionists and assistants. 7. Don’t delay your offer. Once you decide a listing looks like what you want, get on it quickly. Opportunities often slip away in this market because of the strong demand for practices. 8. Don’t insult the seller with a low-ball offer. Says Grable, “The market is becoming fairly orderly in the way it values a practice. You are about to enter into an economic marriage with this person, and you will have to rely on their goodwill to deliver the clients to you. This is not the time for pointless chiseling. Cheap guys come across as not very respectful.” On the other hand, perhaps your low-ish offer is all you can afford. That’s OK. The seller may still pick you anyway if she thinks you are the best candidate and believes her clients will like you. After all, since most of the value will likely come in the form of an earnout, your client retention potential may favor you.

9. Evaluate the financial aspects of the deal very carefully. Be realistic about what you can afford. The payout on these deals can be steep, so be prepared to alter your lifestyle if necessary. And if you’re getting financial resources from third parties for a down payment or other up-front costs, make sure your funding is rock solid. A funding nightmare that doesn’t present itself until closing can cost a lot of people a lot of time and money. Another tip: Go out and get as many credit card approvals as you can while your credit is strongest. “Respect the paradox of credit,” says Grable. “It’s easier to get it when you don’t need it. It is not impossible to get $100,000 if you have a decent credit score and income. Use each credit card or credit line now and then to keep them valid. These unsecured lines of credit can allow you to come up with the down payment on a deal, or help with cash flow needs during an unexpected crunch.” 10. Find and use advisors with experience in the art of the deal. Just because you’re a financial wizard as a planner or investment manager doesn’t mean you can prevail at the game of buying a practice. Don’t be afraid to get help from others who have successfully gone this route before you. They can vastly increase your odds of success. * * * * * Publish your writings in the next edition of the Business Transitions Report: If you have authored or would like to submit a paper on the topics of transition planning, succession planning, practice valuations, or your experience in buying, selling, or merging your practice, please send to:, or call us at 800.934.3303 to discuss this opportunity in more detail.

Structuring the Deal
The most important part of every deal is something
that cannot be written into any contract –the match between the seller and the best qualified buyer.
In the open marketplace, every seller stands before a panel of 30 or more experts who will judge the value of the practice listed for sale. These experts are potential buyers, almost all of whom are experienced financial advisors themselves. These buyers know the true essence of “value” . Value is a function of the deal terms, the tax structure, and the clients who transition over to the new buyer and remain with that buyer in the years following the sale. Without knowing the answers to these questions, it is impossible to determine an exact “price tag” for a given practice. The information presented in this section will explain how these issues impact the buyer and seller, and how they can be successfully planned for and negotiated. It is important to remember that while every deal involves many hours of focusing on the mechanics of the transaction, it really is about the clients. A successful deal structure is one in which both buyer and seller are motivated and capable of working together in an “economic marriage” for a period of time after the deal is completed to take care of the client needs. In sum, the matching of the right buyer with the right seller is the key to the entire process. This section will also address the use of advisors (lawyers, accountants, valuation experts, etc.) to assist in the process of buying or selling a financial services practice. Sometimes advisors help, and sometimes they don’t. Completing an acquisition or sale under the regulatory watch of the SEC, the NASD, and one or more state securities agencies, while addressing the needs of 200 clients or more, is not always easy. Fortunately, there are now hundreds of experienced buyers out there to learn from. Before establishing a purchase or sales price, here are some of the issues that you need to address and understand: Payment Terms There are basically three ways to pay for a practice:  Cash (including down payments and earnest-money deposits)  Promissory Notes, and  Earn-outs Cash: Very few buyers write the seller a check for the full purchase price at closing. Conversely, very few practices are purchased for no cash down at closing. Most transactions are structured so that there is risk and motivation present for both buyer and seller.



Structuring the Deal

Structuring the Deal

The result creates an “economic marriage” for a period of time after the deal is completed, a situation that benefits the real judges of success: the clients being transferred. These payment methods are commonly present in deals where the seller’s gross annual revenues are less than $1.5 million. In deals of this size, there is very little bank financing used. As a result, buyers rely heavily on their own cash reserves and seller financing to carry the majority of the purchase price. In other words, it takes both buyer and seller, in a cooperative effort, to make a deal financially viable for the long term. This co-dependence has resulted in sellers choosing very highly qualified buyers, which in turn, has resulted in very high client retention rates. Lack of bank financing means there is a high degree of flexibility in the deal structures employed between buyer and seller. Although no two deals are exactly alike, there are some common practices in most acquisitions of investment advisory practices. Most acquisitions of practices that sell for less than $500,000 involve two components: 1) a cash down payment of about 30% of the sales price; and 2) an earn-out arrangement or a promissory note for the balance. In transactions where the sales price is between $500,000 and $3,000,000, all three components may be utilized: a cash down payment, an earn-out arrangement, and a promissory note, each comprising about one-third of the purchase price. Earnest-Money Deposit: Most buyers and sellers enter into a Letter of Intent that calls for an earnestmoney deposit of at least 1% of the purchase price. This deposit is typically placed into an escrow account and is a part of the down payment when the deal is completed. The earnest-money deposit is closely tied to an agreed-upon due diligence period. A buyer is entitled to a refund of the earnest-money deposit in the event he or she decides not to proceed with the purchase after completing due diligence. Requiring an earnestmoney deposit is a great way to help determine which buyers are really serious and which are not. Down Payment: A down payment in some amount is a part of virtually every deal. On average, down payments are approximately one-third of the purchase price. A substantial down payment is the

buyer’s risk in the transaction and is made at closing before the buyer has met any of the seller’s clients. Down payments can be paid into escrow and paid out incrementally as certain predetermined benchmarks in the transition process are reached. This will add additional motivation to the post-closing phase of the deal. In the sale of investment advisory practices, the down payments are typically higher than average and can be as high as 50% of the purchase price. Promissory Notes: Promissory notes are used to establish the payment of a sum certain over a specific period of time, and can be used with or without bank financing or an earn-out when the seller is willing to hold the note. Sellers who are willing to accept a promissory note will generally want some form of security for the debt including a UCC (Uniform Commercial Code) filing against the assets and income stream of the buyer’s practice, as well as a personal guaranty. The advantage of using a promissory note from the seller’s perspective is that the payments are fixed and predictable. This method, however, can place undue risk on the buyer, who doesn’t begin to acquire or transition the clients and income stream until after the deal is completed. Promissory notes can also be resold in the open market if the proper language and terms are included in them. We encourage buyers to “adjust” the payments in a promissory note based on the success of the transition and retention of the seller’s clients. (Some buyers and sellers refer to this method as “guaranteeing” the revenues being sold. If the revenues are not delivered, the note is “adjusted” downward to reflect actual transition rates.) It is not unusual for the parties to agree in advance to re-measure the actual number of clients or amount of assets under management that have transferred to the buyer six months or more after closing. If, for example, it is determined that 87% of the seller’s clients’ assets have transitioned to the buyer one year after closing, the parties might agree that the payments will be reduced accordingly and then fixed and secured for the duration of the agreed repayment period. Here is an example of how promissory notes are typically used: In an acquisition of a practice selling for $1 million, a buyer might pay $300,000 in a cash down payment, two notes totaling $400,000, and

an earn-out for the balance. The two notes might be equal in size, but often vary dramatically in the payments and security pledged. It is not unusual to make one of the notes due and payable immediately after closing, and the other placed on “holdback” for several years providing that the first note is paid in full and on time. This allows a buyer to retime his or her payments and maximize the business’ cash flow in the first few years after the acquisition. Earn-outs: The most common method of financing the acquisition of an investment advisory practice is some form of an earn-out, where the buyer pays a percentage of the future business revenues to the seller for an agreed-upon time or up to a set amount. Buyers and sellers can structure an earn-out arrangement in many different ways. Depending on the needs of the buyer and seller, payments can be made monthly, quarterly, or annually, and the percentage rate can increase or decrease from the first payment to the last. Most earn-out arrangements are based on gross revenues (less any broker-dealer override) and are for a fixed period of time, typically 2 to 5 years. To calculate an earn-out, you need to know the approximate purchase price, the amount of the cash down payment, and the amount of any promissory notes, and the length of repayment. The examples below show some of the different ways to pay the same balance owed. Earn-out arrangements typically do not carry interest on the unpaid balance (although for tax purposes, interest will be imputed in the deal). Instead, most earn-outs are not “capped” or limited in the amount to be paid. Although a buyer and seller may agree to a set purchase price, the use of an earn-out creates flexibility that will reward the seller for his or her ongoing efforts after the sale to deliver and help the buyer retain the clients. Conversely, if a seller does not assist in the transition, the earn-out structure shown may result in the seller receiving final payments that are less than the agreed-upon purchase price. Here are a few examples of how earn-out payments can be structured:

Time Period Yr 1 (1st 12 months) Yr 2 (2nd 12 months) Yr 3 (3rd 12 months) Yr 4 (4th 12 months) Yr 5 (5th 12 months) Projected Gross Rev. $ 400,000 $ 400,000 $ 400,000 $ 400,000 $ 400,000 Total % 20% 20% 20% 20% 20% Payment $ 80,000 $ 80,000 $ 80,000 $ 80,000 $ 80,000 $400,000
Figure: 4

Total Projected Payments - 5 Yr Period

Time Period Yr 1 (1st 12 months) Yr 2 (2nd 12 months) Yr 3 (3rd 12 months) Yr 4 (4th 12 months) Projected Gross Rev. $ 400,000 $ 400,000 $ 400,000 $ 400,000 Total % 30% 30% 20% 20% Payment $ 120,000 $ 120,000 $ 80,000 $ 80,000 $ 400,000
Figure: 5

Total Projected Payments - 4 Yr Period

Time Period Yr 1 (1st 12 months) Yr 2 (2nd 12 months) Yr 3 (3rd 12 months) Projected Gross Rev. $ 400,000 $ 400,000 $ 400,000 Total % 40% 40% 20% Payment $ 160,000 $ 160,000 $ 80,000 $ 400,000
Figure: 6

Total Projected Payments - 3 Yr Period

Asset Sale vs. Stock Sale: There are actually several “assets” that are purchased in the acquisition of a financial advisory practice. For example, even the smallest practice involves the acquisition of seller’s goodwill, client files, a client list, the seller’s agreement not to compete for or solicit the client list, file cabinets, software, and the seller’s post-closing assistance in delivering and retaining the clients. These are the staples of every deal. There are different tax implications for both the buyer and the seller depending on the structure of the transaction and the tax allocation of the purchase price. If the seller does business as a sole proprietorship, partnership, S-corporation, or limited liability company, the sale of the practice will usually take the form of an asset sale. If the seller does business as a



Structuring the Deal

C-corporation, the deal will occasionally be structured as a stock sale, although tax law allows an asset sale to work almost as well. In some instances, a hybrid of the two is employed in the form of a 338(a) election which allows a buyer to treat a stock acquisition as an asset purchase. Without over-complicating the choices, almost all sales of financial advisory practices with less than $1.5 million in gross revenues are structured as asset sales. Asset sales help to reduce a buyer’s liability and to allow for the ongoing depreciation of the purchase price following the acquisition. A qualified local CPA can help you address these issues in most cases. Even a C-corporation can avoid double taxation on a sale of its assets. Several seminal tax cases allow the seller to allocate a part of the purchase price to personal goodwill instead of to the business. An allocation to personal goodwill incurs capital gains tax instead of double taxation through the C-corporation. Due Diligence: Due diligence refers to the review process performed by a buyer to verify the underlying aspects of a seller’s practice. During the review process, the seller is expected to disclose proprietary and confidential information. The purpose of due diligence is to help the buyer determine the benefits and liabilities of a practice for sale by inquiring into all relevant aspects of the past, present, and predictable future of the business. Due diligence will help a buyer decide whether they want to go forward with the transaction or whether they want to renegotiate the price and terms of the deal based on the results of the review. Sellers generally assemble a complete packet of due diligence materials and make several copies of the entire packet in an effort to quickly provide the needed review materials to waiting buyers. In most cases, a buyer does not begin due diligence on a seller’s client files until a formal letter of intent is offered and accepted and an earnest money deposit is collected by escrow. Due diligence typically occurs both before and after a Letter of Intent is signed by a buyer and accepted by the seller. (About one-fourth of the due diligence process is completed before the written offer is

made.) Some buyers choose to retain the services of an attorney or CPA to help with the due diligence process, but most handle the review process themselves. Note that it is quite normal to find “red flags” in the due diligence process - that’s what due diligence is for. Every business has its weak points. As the buyer, your job is to determine what those weak points are before you buy, plan for them after the acquisition is complete, and to consider the impact in the final price you pay for the business. Consulting Agreement: A major component of every purchase is a seller’s post-closing assistance in delivering and assisting the buyer in retaining the clients. Every deal should have a transition plan, time frame, and duty roster outlining and coordinating the efforts of buyer and seller in making sure the clients are taken care of. The work performed by the seller in this instance is classified by the IRS as labor, which results in ordinary income for the seller and an ordinary expense for the buyer. After a deal is completed, buyer and seller must file tax form 8594 with the IRS, setting forth the agreed-upon tax allocation of the transaction. In addition, the tax allocation strategy should be applied separately to the down payment component of the acquisition. Since the buyer will send the seller a 1099 after the sale is completed for a portion of the purchase price, the parties should reach a clear understanding of how the transaction purchase price will be allocated, and this understanding should be put in writing before closing. Non-Competition and Non-Solicitation Agreements: Every transaction involves a seller’s agreement not to compete or solicit, though there is more flexibility here than is commonly known. The average length of a non-competition agreement is 3 to 5 years, or at least until the purchase price is paid in full. In the case of a partial book sale, the seller typically agrees not to compete for, or solicit, the clients being transitioned to the buyer. In the case of a distress sale (a sale upon the loss of a license or temporary disability), the seller often agrees to a non-competition agreement for a year or two at the most, with a longer non-solicitation agreement prohibiting the seller from calling the clients sold.



Structuring the Deal

There are additional methods of strengthening a non-competition/non-solicitation agreement. For example, in addition to having the seller sign a noncompetition/non-solicitation agreement, also consider acquiring the seller’s staff, software, and marketing systems. Paying for a practice using an earn-out formula penalizes a seller who breaches the non-competition/non-solicitation agreement by reducing the amount of money paid to the seller if any cash flow is diverted. A buyer should always acquire the seller’s business name and business phone numbers as well, even if they won’t be used. Cumulatively, these steps make it much harder for a seller to compete. Non-competition agreements must be reasonable in time, scope, and geography, and specific in terms of the business activity addressed. Always consult with an attorney in your state who has experience in litigating on these issues before signing, or relying on, these agreements. Indemnification and Hold-Harmless Clauses: It is important for the parties to understand what they are each responsible for. Accordingly, the first step is to have a clear, written transition plan that spells out what each party is responsible for. Next, both sides should understand that, in every deal, there is a period of time after closing where both sides are responsible for the clients in transition. The dividing line is typically drawn on a “work performed” basis until the clients have signed a new investment advisory agreement with the buying advisor. A typical indemnification and hold-harmless clause will be supplemented with a dispute resolution clause and a requirement that the prevailing party in any arbitrated dispute is able to recover attorney fees and costs. Security and Collateral: Seller financing is involved in almost every deal to some extent, and this factor often determines the level and amount of security required of a buyer. At a minimum level, every deal must be personally guaranteed by the buyer, and usually their spouse as well. The next level of security involves the filing of a Uniform Commercial Code (UCC) Financing Statement, creating a lien on the acquired assets. The amount of security required, and the type of collateral, depends on how the deal is structured and the type of practice being acquired.

If a buyer pays the seller 40% of the purchase price in a cash down payment, and agrees to pay the balance in the form of a 3-year earn-out on a percentage of the gross, it is difficult to post collateral or security because the final purchase price is contingent on the success of the deal. If the income stream is smaller (less than $150,000 annually) or has non-recurring income, most buyers will not offer any more than a personal guarantee that they will pay what is owed, when it is due. It is much easier to secure a balance owed when the debt is in the form of a promissory note for a sum certain. Most promissory notes are personally guaranteed and backed with a lien on the acquired assets, at a minimum. Resolution of Conflicts: Most buyers and sellers agree to submit their disputes to binding arbitration with the prevailing party entitled to recover attorney fees and costs. Most disputes occur with sellers who acquire practices that are not located in the immediate vicinity of the seller. These disputes typically result because there is more demand placed on both the buyer and seller in making the deal work, and because the seller often stays more actively involved after the sale. It is difficult for many sellers to give up control and shift to an employee status. Approximately 1.5% of the completed deals we have been involved with resort to arbitration to resolve their disputes. Surprisingly, the majority of these disputes center on the seller’s breach of the non-competition/non-solicitation agreements rather than the buyer’s failure to make the payments due. Summary: The most important aspect of structuring a deal that works for everyone is finding the correct match between buyer and seller. With an average of 30 buyers per seller, it is relatively easy to find a new advisor with equal or superior credentials as compared to the seller. From the client’s point of view, a change in which there is added value is a good thing. After all, it will be your clients who judge the success of your deal. * * * * *

Partial Book

Partial book sales are a trend that is already taking
the profession of financial advice a quantum-leap forward by allowing advisors to fine-tune the focus of their practices and redistribute clients to smaller, younger advisors, where the clients will be highly valued.
In fact, by selling smaller, more demanding, less profitable clients to younger, less experienced advisors, the planning community is unintentionally creating the professional career transition from associate to independent practitioner that has until now been lacking. The marketplace was quick to realize that a partial book sale offers younger practitioners an affordable acquisition option and, in many cases, the seller’s mentoring as well. Each of the Business Transition sites includes a special option to list a partial book sale. Buyers typically get to work with the seller for at least six months and, more often than not, continue that relationship and work with the seller to acquire additional clients, as the seller reduces the size of his or her practice over time and as retirement approaches. Partial book sales allow sellers to concentrate on their better clients, and, by shedding less profitable Industry Summary Averages Sales price $153,000 Time on the Market in Months 2.5 No. of Clients 89 Price to Revenues Ratio 1.6 AUM in Millions $6 Weighted Average Length of Payout % Down Payment % Earnout % Promissory Note Consulting Hours - First Year Non-Competition Non-Solicitation Tax Components Capital Gain SE Income Ordinary income 3.4 41% 42% 17% 334 4.2 Yrs. 3.8 Yrs. 77% 17% 6%
Figure: 7

clients, to enhance the value of their practices. Today’s buyers want practices with fewer clients, particularly fewer marginal clients. Selling part of a book allows a seller to reshape their practice and can provide cash to help the conversion to fees, or to market for new, specific types of clients (such as fee-based or fee-only).



Partial Book Sales

A growing number of partial book sales are part of a “four-step” retirement plan, in which a successful advisor phases out of the business by selling one-quarter of his or her clientele at a time. It’s an effective system, leaving the seller with less work for more money. Obviously, smart sellers keep their best clients for last, often finding that with the increased attention, the highest quartile of clients ends up generating more revenues than their original practice did. Keep in mind that the value of clients is relative: The bottom-level clients sold by these senior-level practitioners are often better than the clients the younger buyers have, so the buyers take very good care of these new clients and their investment in them. Partial books usually command a higher–than-average down payment (41%), with the balance paid over an average of 3.4 years, demonstrating the high value placed by younger advisors on these unique, smaller offerings. The average partial book sale is for $153,000, with an average AUM of about $6 million. Most partial books are sold for the same overall value multiple as whole practices: 2.1 times recurring fee revenues and 1.1 times non-recurring commissions. But from a buyer’s perspective, partial books offer an affordable acquisition opportunity, as well as mentoring by the seller. Each acquisition comes with approximately 330 hours of available consulting time from the seller over the course of a 12 month period, primarily to help transfer the clients, but also to help get the buyer prepared for the adventure. Each partial book acquisition involves an average of 89 clients. While buying a partial book can be a very affordable way for a smaller, first-time buyer to quickly grow their practice, it can also serve as an audition for a buyer to prove himself or herself, and later acquire the entire practice. Because the buyer’s motivation is strong, transition rates on the partial books tend to be very high. Deal structures are unique in that, with most partial book sales, the buyer and seller both anticipate that the seller will not sign a non-compete agreement beyond not working with the sold clients. These sellers are not retiring or exiting the practice; they are making a strategic business decision.

Demand is strong, and the time on the market much less than normal, as most buyers often skip the letter of intent and simply go straight to an Asset Purchase Agreement after minimal discussions and due diligence with the seller. Time on the market is about 10 weeks, 6 weeks less than normal, and this is from the day the seller’s listing becomes active (or visible to the public) to the day the transaction closes, the longest possible measurement points. Once an offer is accepted, the average time to closing is about 4 weeks. In terms of location, most partial book sales are completed by buyers who are located within 50 miles of the seller’s office, and usually much closer than that. In the two years that partial book sales have been offered on the Transitions sites, these listings have gotten bigger and are selling faster. And the entire process is still in its infancy. The benefits of an independent, efficient marketplace for financial service practices goes far beyond the creation of a widely accessible, predictable exit strategy. It creates opportunities and options for advisors, while benefiting advisors’ clients at the same time. Partial book sales are a great example and a great way for the older generation to work with the next generation. * * * * *

Sample Forms
Confidentiality Agreement (Short Form) Version 8.0
For modifications or additions to the terms below, attach one or more Addendum pages as needed.



The undersigned prospective Buyer (“Buyer”) has or will request information from the Seller of the abovenoted practice listed and located by Buyer on the FP Transitions’ site. As a condition to Seller’s furnishing such information to Buyer, Seller requires that Buyer treat confidentially all information furnished in connection with this considered transaction (collectively the “Evaluation Material”), whether furnished before or after the date of this Agreement. As used in this Agreement, the term Evaluation Material means: (1) proprietary information of Seller’s businesses; (2) information marked or designated by Seller as confidential; (3) information, whether or not in written form and whether or not designated as confidential, which is known to either party as being treated as confidential; and (4) information provided to Buyer by third parties which Buyer is obligated to keep confidential. Evaluation Material includes, but is not limited to, client lists, marketing strategies, books and records, financial reports, client demographic reports or studies, client data, trade secrets, billing systems, seminar materials, teaching materials, brochures, techniques, models, data, programs, documentation, processes, know-how, marketing plans, and technical, software or programming information unique to Seller’s business. Buyer acknowledges that any disclosure of Evaluation Material will cause irreparable harm to the Seller/owner of the Evaluation Material. Accordingly, Buyer agrees not to disclose any Evaluation Material, directly or indirectly, under any circumstances or by any means, to any third person without the express written consent of the Seller/owner of the Evaluation Material. Buyer agrees that he/she will not copy, transmit, reproduce, summarize, quote, or make any commercial or other use whatsoever of Evaluation Material, except as may be necessary to perform their due diligence. Further, Buyer agrees to exercise the highest degree of care in safeguarding Evaluation Material against loss, theft, or other inadvertent disclosure, and agrees generally to take all steps necessary to ensure the maintenance of confidentiality.



This Agreement shall not apply to any information now or hereafter voluntarily disseminated by Seller to the public, or which otherwise becomes part of the public domain through lawful means. Buyer agrees that upon termination of the due diligence process or the transaction contemplated herein, and upon request of the party owning or supplying the Evaluation Material, he/she will promptly return to the owner or supplier all Evaluation Material in whatever form, that may be in their possession or under their control. Buyer agrees that in the event either or both parties fail to abide by this Agreement, the damaged party will be entitled to any and all remedies provided under the law. The obligations on Buyer as set forth in this Agreement will continue for as long as Buyer is in possession of the Evaluation Material and for an additional period of 3 years from the date of this Agreement. A facsimile transmission of a signature to this Agreement shall be legal and binding on the signer. Buyer, by signing below, acknowledges that he/she has read and understood the terms of this Agreement. BUYER:

Confidentiality Agreement (Long Form) Version 8.0 For modifications or additions to the terms below, attach one or more Addendum pages as needed.

FP Transitions Listing No.

This Agreement is made and entered into between the Buyer (print name): , and Seller (print name): . Buyer and Seller have entered into discussions, or may engage in discussions, concerning a potential business transaction (“Transaction”) in which Buyer would acquire Seller’s business (“the Business”). In the discussions, Seller may disclose to Buyer certain Confidential Information (as hereinafter defined) of Seller and the Business, and Buyer may disclose to Seller certain Confidential Information of Buyer including information about its processes and procedures. To protect their respective proprietary rights in such Confidential Information and in consideration of disclosure of Confidential Information, Seller and Buyer agree as follows: 1. Confidential Information Defined.


Print Name

As used in this Agreement the term “Confidential Information” as applied to information provided by or on behalf of Seller or Buyer in the course of the discussions or resulting due diligence means generally all nonpublic information pertaining to Seller or Buyer, as further described below:
Copyright 1999-2005 by Business Transitions Publishing, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher. Please contact Business Transitions Publishing, Inc., at 800-934-3303 for distribution requests.

a. Confidential Information includes, without limitation, client lists, client files, financial plans, insurance policy forms; actuarial information and analysis; assignments, guarantees and agreements; business and marketing information, strategies and plans; computer hardware and computer software; administrative procedures and guidelines; employee data; agency and brokerage information; vendor and customer lists; customer information; financial statements; information concerning accounts receivable and payable; billing information; trade secrets or intangible information owned by Buyer or Seller or either’s affiliates or in which Buyer or Seller have any right of ownership; and information pertaining to acquisitions, research and development efforts and business forecasts. Business Plans, intended use of the acquired business and market data of the Buyer or Seller, including data on the Buyer’s or Seller’s business, name, employees, client base, finances, trade secrets are also included under this definition. b. Confidential Information may be in written, electronic or other form. Confidential Information need not be expressly labeled or identified as such to be entitled to the treatment required by this Agreement. c. Confidential Information may be either owned by Seller or Buyer or the property of a third party and made available to Seller or Buyer under license or other arrangements. d. Confidential Information includes all copies or reproductions of Confidential Information and reports, analyses, notes and other derivative material incorporating Confidential Information. 2. Exclusions to Definition. Anything contained in Section 1 above to the contrary notwithstanding, Confidential Information does not include the following information:



a. Information that is generally available to the public other than as a result of Buyer’s or Seller’s breach of its obligations under this Agreement; b. Information known by Buyer or Seller prior to the date of disclosure to Buyer by Seller; or the Seller by the Buyer; c. Information made available to Buyer or Seller from a third party entitled to disclose it; or d. Information developed by Buyer or Seller independently of its activities under this Agreement. 3. Use and Treatment of Confidential Information. The parties agree that Seller’s and Buyer’s Confidential Information shall be used and treated as follows: a. Buyer shall use Seller’s Confidential Information only for the purpose of completing its due diligence of the Seller as set forth herein and for no other purposes. Seller shall use Buyers Confidential Information only for the purpose of completing its due diligence of the Buyer as set forth herein and for no other purposes; b. Buyer will not disclose, divulge, or transfer, either directly or indirectly, Seller’s Confidential Information to any third party without the written consent of Seller. Seller will not disclose, divulge or transfer, either directly or indirectly, Buyer’s confidential Information to any third party without the written consent of Buyer; c. Buyer and Seller will maintain the confidentiality of each other’s Confidential Information by using the same degree of care (which shall be no less than reasonable care) as Buyer and Seller use to protect their own confidential information of a similar nature, and will restrict its dissemination to those of its employees or advisors who have a need to know the Confidential Information in connection with the discussions between Buyer and Seller; d. All Buyer and Seller Confidential Information shall remain the exclusive property, respectively, of Buyer or Seller. At the conclusion of the relationship between the parties, upon the owner’s written request, Buyer or Seller will within ten (10) business days after receipt of such request return Confidential Information supplied by Seller to Buyer or by Buyer to Seller, or at Seller’s or Buyer’s option, Buyer or Seller will destroy such Confidential Information and promptly send to Seller or Buyer written certification of such destruction; and e. Buyer and Seller shall be liable under this Agreement each to the other for any disclosure of Confidential Information in violation of this Agreement by Buyer or Seller or its affiliates, employees, attorneys, accountants or other advisors (“Representatives”). 4. Limitations on Buyer’s/Seller’s Obligation. In the event that Buyer or its Representatives become legally compelled to disclose any of the Confidential Information provided by Seller, Buyer shall provide Seller with prompt written notice of such requirements so that Seller may seek a protective order or other appropriate remedy or waive compliance with the terms of this Agreement. In the event that such protective order, waiver or other remedy is not obtained, Buyer agrees to provide only that portion of Seller’s Confidential Information which is legally required and to exercise its reasonable efforts to obtain assurances that confidential treatment will be afforded to such Confidential Information. In the event that Seller or its Representatives become legally compelled to disclose any of the Confidential Information provided by Buyer, Seller shall provide Buyer with prompt written notice of such requirements so that Buyer may seek a protective order or other appropriate remedy or waive compliance with

the terms of this Agreement. In the event that such protective order, waiver or other remedy is not obtained, Seller agrees to provide only that portion of Buyer’s Confidential Information which is legally required and to exercise its reasonable efforts to obtain assurances that confidential treatment will be afforded to such Confidential Information. 5. Termination. This Agreement shall have a term of three (3) years unless extended by mutual agreement. 6. No Representation or Warranty. Neither Seller nor Buyer nor any of its affiliates, agents, advisors or representatives have made or make any representation or warranty, expressed or implied, as to the accuracy or completeness of the Confidential Information. Only those representations and warranties that are made in a definitive agreement, when and if executed, will have any legal effect. 7. Confidentiality of Existence of Agreement or Discussions. As used in this Agreement the term “Confidential Information” as applied to information provided by or on behalf of Buyer and Seller shall include the existence of this Agreement, the fact of Buyer’s or Seller’s engagement in discussions concerning a Transaction, the terms of any proposal, offer or indication of interest by Buyer or Seller and any eventual business relationship that results. 8. Remedies. Each of Seller and Buyer acknowledge and understand that the use or disclosure of the Confidential Information of the other party in any manner inconsistent with this Agreement will cause irreparable damage to such other party. Each of Seller and Buyer shall have the right to: (a) seek equitable and injunctive relief to prevent such unauthorized, negligent or inadvertent use or disclosure; and (b) recover the amount of all such damage (including attorneys’ fees and expenses) in connection with such use or disclosure. In the event that any court of competent jurisdiction determines that any provision of this Agreement is too broad to enforce as written, such court is authorized and directed to construe, modify or reform such provision to the extent reasonably necessary to make such provision enforceable. Nothing in this Agreement shall be construed to prohibit Seller or Buyer from pursuing any other available remedies for breach or threatened breach of this Agreement, including the recovery of damages. 9. Severability. If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. 10. Assignment. This Agreement may not be assigned by Buyer or Seller without the prior written approval of the other party, provided that Buyer may assign its rights hereunder to a third party acquiring the Business that assumes all obligations of Buyer under this Agreement. 11. Exclusive and Entire Agreement. This Agreement reflects the entire understanding of the parties relative to the subject matter hereof.



12. Amendments and Waivers. This Agreement may not be amended except in a writing signed by both parties. No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of a right, power or privilege preclude the exercise of any other right, power or privilege under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on Buyer Seller , 2005.

Due Diligence Checklist
Version 8.0

Name, Title Name, Title

Obtain a written breakdown of the client base showing the number of clients, their states of residence, the number of years each client has been with seller’s practice, and how each client selected the seller as their advisor. Obtain a breakdown or production record of the revenue sources to the seller’s practice, including types and frequency of revenue generated. Determine the office/business structure of seller (sole practitioner, corporation, limited liability company), including identification of any partners, employees or others licensed to work with seller’s client base. Obtain copies of any business plans, descriptions of company, or brochures. Review seller’s office manual, compliance manual and privacy policy. Determine if seller’s reported gross income includes bonuses, awards, or other forms of non-recurring revenues that will not be available to buyer after closing. Determine the amount of broker-dealer override. Similarly, if seller is an investment advisor, determine the annual fees typically charged, the amount of any broker-dealer override on the investment advisory accounts, and whether fees are charged in arrears or advance. Identify any market niches that seller has developed that may prove beneficial to a buyer. Print and confirm that the full-page FP Transitions’ Seller’s Listing Form represents reasonably accurate data – determine any material changes since the date of listing, and reasons for the changes. Confirm that seller will assist buyer after closing in transitioning the client base to buyer on at least a parttime basis for at least three to four months (larger and more diverse client bases may require additional seller support and transition time).

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Copyright 1999-2005 by Business Transitions Publishing, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher. Please contact Business Transitions Publishing, Inc., at 800-934-3303 for distribution requests.

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Obtain a copy of the current Form U-4 for Seller and all employees, Form ADV if applicable, along with proof of filing. Confirm filing status and any disciplinary history using the NASD’s on-line verification process. Review copies of all seller’s security and business licenses and permits. Determine the date of the peer review, or last regulatory audit conducted by state, federal or self-regulatory agencies, and review deficiency letters and any related correspondence. Review any correspondence from customers or suppliers relating to complaints or disputes about seller’s practices.



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Obtain copies of each report or other document file with governmental agencies that have regulatory power over seller. Obtain a description of all litigation, administrative proceedings, governmental investigations, or inquiries, pending or threatened against, or involving seller or any subsidiary.

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Obtain copies of all collective bargaining and other labor agreements. Investigate all pending litigation or administrative matters involving employees, including discrimination charges, grievances, arbitration cases, workers’ compensation cases, and similar matters.


PERSONAL PROPERTY (if applicable)

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Obtain copies of financial statements of seller for the past three years, including interim statements for the year to date. Obtain copies of federal, state, and local tax returns and reports of seller for the last three years. Sellers should obtain a credit report on the buyer. Obtain copies of all documents and correspondence concerning any pending or threatened audit or tax claim against seller or seller’s assets. Obtain copy of any UCC filings or tax liens from the seller and/or the Secretary of State where the seller’s business assets are located. Inquire as to whether the Seller has ever had a formal valuation of his/her practice prepared.

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Obtain a list of all personal property being transferred in the sale (copier, fax machine, phone systems, file cabinets, etc). Check UCC filings against all personal property assets. Obtain a copy of the original warranties, instructions, and purchase receipts for the assets. Obtain copies of any service agreements, and determine ongoing costs for the service and maintenance of the assets.

AGREEMENTS Obtain copies of the following:

PURCHASE / NEGOTIATION ISSUES Determine general terms of the acquisition, including:

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All real and personal property leases, including leases for fax machines, copiers, phone systems, DSL lines, etc. All partnership or joint venture agreements of any partnership in which seller or any subsidiary is a member. All agreements pertaining to marketing, including all advertisements, professional dues, etc. All insurance agreements in force with respect to seller, including general premises liability insurance, errors and omissions insurance, etc. All material agreements with vendors. All agreements with officers, directors, and shareholders and their affiliates. All covenants not to compete, confidentiality agreements, and other restrictive agreements.

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Down payment Terms of earn-out arrangement or promissory note Seller financing, security/collateral Compensation to seller for additional referrals to buyer after closing Non-solicitation/non-competition agreements Life insurance/disability insurance Dispute resolution Continuation of seller’s license(s) Transition period, extent of seller’s involvement, duties after closing Closing date

Copyright 1999-2005 by Business Transitions Publishing, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher. Please contact Business Transitions Publishing, Inc., at 1-800-934-3303 for distribution requests.

EMPLOYMENT AND LABOR MATTERS Obtain a schedule showing the total number of employees, their job classifications, licenses held, average compensation, bonuses, benefits, and location of employment. Review any employmentagreements,bonus arrangements, or employee stock-ownership plans. Obtain copies of all personnel policy booklets.

These sample forms, including the Short-Form Confidentiality Agreement, Long-Form Confidentiality Agreement, and Due Diligence checklist, are designed to provide general guidance to a wide variety of buyers and sellers of stock or business assets related to a financial services practice and may not be suitable for all users or situations. This document is provided and is to be used with the understanding that the publisher is not engaged in rendering legal, accounting, tax or other professional advice or service. If legal, accounting, tax or other professional advice or assistance is needed, it is the user’s responsibility to seek the services of a competent professional.


Chart Index
Chart 1: Chart 2: Chart 3: Chart 4: Chart 5: Chart 6: Chart 7: Chart 8: Chart 9: Chart 10: Chart 11: Chart 12: Chart 13: Chart 14: Chart 15: Chart 16: Chart 17: Chart 18: Chart 19: Chart 20: Chart 21: Chart 22: Chart 23: Chart 24: Chart 25: Chart 26: Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Unplanned Transitions - Age Range Unplanned Transitions - AUM Average Price to Rev. Ratio Average Sale Price Average Age of Seller Average Time in Industry Average Number of Clients Average Client Account Size Average Revenue per Client Average Buyer Age Average Down Payments Avg. Percent of Deals Using Earn-outs Avg. Percent of Deals Using Prom. Notes Tax Component Average - Commission Tax Component Average - Fee-Based Tax Component Average - Fee-Only Average Inquiries Average Offers Average Number of Employees Average Time on the Market Overall Post Closing Satisfaction Number of Buyers & Sellers Number of Clients Retained AUM/AUA Retained Cash Flow Retained Number of New Referrals Business Transitions Indexes Averages> Unplanned Transitions Sample Seller Listings Payout Example 1 Payout Example 2 Payout Example 3 Partial Books>Industry Summary 12 12 13 13 14 14 14 15 15 15 16 16 16 17 17 17 18 18 18 19 50 50 50 51 51 51 6 11 20 73 73 73 77



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