Should You Buy a Book of Clients to Scale Your Financial Planning Business?

Summary

Connell from Cobalt discusses scaling a financial planning business through acquiring an existing book of clients. He explores the benefits of this strategy, such as immediate revenue and cash flow increase, which allows reinvestment into the business. However, he also highlights the risks and necessary due diligence involved. Connell provides insights into valuation, financing options, and the importance of aligning client expectations with service models. He emphasizes the rarity of the 'perfect' book and suggests alternative strategies for growth, like organic marketing.

Highlights

• Buying a book of clients instantly boosts revenue and cash flow, providing opportunities for further business investment 💰.
• Advisors often feel trapped in a cycle of needing resources to grow but lacking cash flow, making client acquisition a viable escape route 🔄.
• Valuation multiples can vary widely, impacting the perceived value and terms of the deal 💹.
• Different financing options, such as vendor finance, can assist in securing the purchase of a client book 💳.
• Due diligence is crucial to assess potential client attrition, compliance risks, and revenue verification 🔍.
• Finding the ideal book of clients can take time and requires strategic networking and patience ⏳.
• Alternatives to buying include investing in organic marketing campaigns for a gradual increase in clientele 📊.

Key Takeaways

• Buying a book of clients can rapidly boost your business, but it's not without its challenges 😅.
• Immediate revenue and cash flow can help break the cycle of stagnation for advisors 💸.
• Valuation and deal structure play crucial roles in the success of the acquisition 📝.
• Financing options vary; secured, unsecured, or vendor finance ⏳.
• Due diligence is vital to mitigate risks and understand what you're acquiring 📊.
• Perfect books are rare; be realistic about the search for the perfect acquisition 🕵️.
• Explore alternative growth strategies like organic marketing 📈.

Overview

In this insightful discussion, Connell from Cobalt dives into the strategy of buying a book of clients—a quick way to scale financial advisory businesses. He highlights the benefits such as instant cash flow and increased revenue, making it an attractive option for advisors looking to break free from the stagnation cycle.

The video delves into the complexities of valuating a client book, assessing various financing methods, and understanding the potential risks involved. Connell emphasizes the importance of thorough due diligence to ensure acquisition success and warns about the unrealistic pursuit of a 'perfect' client book.

Concluding with alternative growth strategies, Connell suggests exploring options like organic marketing campaigns. These provide a slower yet stable method of increasing business without the challenges and risks tied to acquiring a book of clients.

Chapters

• 00:00 - 00:30: Introduction to Scaling with a Book of Clients The chapter introduces the concept of scaling a financial planning business by acquiring an existing book of clients. It highlights this strategy as effective for both solo advisers and midsize firms aiming to expand their client base. The chapter promises to cover topics such as the valuation and structuring of the deal, financing options, associated risks, and necessary due diligence.
• 00:30 - 01:00: Why Buy a Book of Clients? The chapter titled 'Why Buy a Book of Clients?' discusses the benefits of purchasing a book of clients as a growth strategy. It highlights that buying a book provides an instant increase in revenue, cash flow, and clients as opposed to the slower method of organic growth. The chapter acknowledges a common issue faced by advisors, describing it as a cycle of being too busy, which purchasing a book may help alleviate by providing immediate results.
• 01:00 - 01:30: Challenges of Organic Growth This chapter discusses the challenges businesses face in achieving organic growth. It highlights the self-fulfilling cycle where companies can't invest in necessary resources like money, technology, or staffing because of limited cash flow, yet they need to grow to increase that cash flow. The text suggests purchasing a book of clients as a potential solution, providing immediate cash flow to enable further investment in the business, though this is noted to not be a perfect solution.
• 01:30 - 02:00: Valuing a Financial Planning Book The chapter discusses strategies for valuing a financial planning book, focusing on both organic growth and client acquisition. It emphasizes the importance of determining the right method for business expansion. The text highlights considerations such as increased cash flow versus additional commitments. It also touches on book multiples and contract terms as essential factors in the decision-making process.
• 02:00 - 02:30: Important Valuation Variables The chapter "Important Valuation Variables" discusses the current valuation of a financial planning book, emphasizing the wide range of potential values, from as low as 4 times to as high as 8 times. It suggests using a 2.5 mark as a starting point for valuations. The chapter also advises using Radar results found in the valuations tab as a resource for considering various valuation variables.
• 02:30 - 03:00: Contract Terms and Deal Structure The chapter discusses various elements that can influence contract terms and the overall structure of a deal. It touches upon factors such as client age, whether older clients receive discounted rates, and the type of service model used, like fixed-term agreements vs. ongoing services. It also explores client expectations in terms of deliverables, such as the frequency of reviews per year, and how these can impact the average fee size per client. There is a consideration of how higher fees might lead to a higher multiple in deal evaluations, reflecting the author's perspective on the balance between client fees and business valuation.
• 03:00 - 03:30: Financing Options and Considerations The chapter discusses different financing options and considerations when managing clients and revenue streams. It compares the benefits of having fewer clients with higher payments against more clients with lower payments, weighing the pros and cons of exposure risk and revenue dependency on clients. The chapter also evaluates different revenue types, such as ongoing fees versus insurance commissions, and notes that books heavy on risk can be lucrative due to reduced upfront time investment.
• 04:00 - 04:30: Finding the Right Book to Buy The chapter discusses the process of selecting the right book to buy, emphasizing the importance of not solely focusing on price multiples. It highlights the pitfalls of obsessing over obtaining lower multiples as the ultimate decision factor. Instead, the narrative suggests considering the terms of a deal in conjunction with multiples, as both elements are critical in evaluating the worth of a book. The text encourages a broader perspective by factoring in both the terms of the agreement and the multiple itself when making purchasing decisions.
• 05:00 - 05:30: Risks and Due Diligence This chapter discusses various scenarios and factors influencing revenue recognition and financial risk, particularly in contracts. It analyzes different payment structures, such as full upfront payment without a clawback period, partial upfront payment with a clawback period, and vendor financing with monthly installments, to illustrate how these can impact the perceived value and risk associated with ongoing and insurance-related revenue streams.
• 06:00 - 06:30: Does the Perfect Book Exist? This chapter discusses the dynamics and strategies involved in negotiating business deals, specifically focusing on buying and selling scenarios. It emphasizes that different factors matter to different buyers and sellers. For example, sellers who prefer receiving a lump sum may agree to a lower multiple, while those who are retiring and willing to stay involved longer might seek a higher multiple.
• 07:00 - 07:30: Alternate Growth Strategies The chapter titled 'Alternate Growth Strategies' discusses various aspects of financing options including secured and unsecured options. It highlights the challenge of financing purchases and suggests doing financial calculations using a multiple of 2.5 over a 5-year loan period. Consideration of remaining cash flow after tax and expenses is emphasized as a critical step in this process. Additionally, these strategies are presented as a way to reduce risk in financial planning.
• 08:00 - 08:30: Conclusion and Call to Action This concluding chapter emphasizes the importance of maintaining a healthy cash flow buffer when making substantial purchases, particularly in business growth. It advises aiming for a finance duration of at least ten years to ensure financial stability and success, while acknowledging the presence of other influencing factors.

Should You Buy a Book of Clients to Scale Your Financial Planning Business? Transcription

• 00:00 - 00:30 Good day. I'm Connell from Cobalt and today we're talking about one of the fastest ways to scale a financial planning business. Buying an existing book of clients. Whether you're a solo adviser looking to grow or a midsize firm looking to expand, acquiring a book can be a gamecher. In this video, I'll walk you through why buying a book can be a powerful scaling strategy, how to value and structure the deal, options for financing the purchase, the risks and must have due diligence, and whether
• 00:30 - 01:00 the perfect book actually exists, and a quick comparison between some alternate strategies uh for growth instead of buying a book. First up, why buy a book in the first place? Uh simply put, it's an instant way to add revenue, cash flow, and clients compared to slow and steady organic growth. One of the biggest problems we hear from advisers is or or it's more like a cycle that they're trapped in. They're too busy. Uh to get
• 01:00 - 01:30 more efficient, they need to invest in money or technology or staffing. However, they don't have the cash flow to spend on the business. So, they need to grow to increase the cash flow, and they can't grow because they're too busy. So it's this selfish fulfilling uh loop they can't get out of. Purchasing a book of clients can break this cycle. It can add that cash flow that the business needs which gives the adviser the ability to invest in the business to solve other issues. However, of course, this isn't a perfect solution. Unlike
• 01:30 - 02:00 organic growth where you attract clients uh you know who buy into your business and your brand, bought clients can be their own project in their own right. You need to you know meet them and bed them down into your business. So, you know, deciding if this is the right method for you is a big one and it's important. Um, the big one is having a a think about that increased uh, you know, cash flow, you know, compared to that extra, you know, commitment um, in the tasks you're going to have to do. Book multiples and contract terms. One of the first
• 02:00 - 02:30 questions you'll have is what is the current value of a financial planning book? Uh, we've seen it all. I've seen eight. I've seen four times. Uh the spread is wide. A pretty good starting place at the moment would be just starting at that 2.5 mark, digging a bit deeper and then deciding if it's worth more or less. I'm sure you've seen Radar results and if you haven't, have a look. Um it's really good resource in the valuations tab. Um they'll give you some ideas around some variables to consider.
• 02:30 - 03:00 Some they'll talk about and some other ones could include client age, you know, do older clients get discounted, you know, um service model, are they on fixedterm agreements or ongoing? Um you know, like what have the clients been promised every year? Are they one review, four reviews? Um you know, average fee size, that's an interesting one. You'll note some people looking for a higher multiple with higher fees per client. Um, which I agree with to a certain point, but just have a have a
• 03:00 - 03:30 think to yourself. Would you rather, you know, 10 clients paying 10 grand a year or 20 clients paying 5 grand per year? Um, quantity of clients. Um, you know, obviously having less is a good thing, but at a certain point, you've got exposure risk. You know, you don't want to lose one client and it's 20% of your revenue. Revenue type, of course, is another one. Is it mostly ongoing fees or is it mostly insurance commissions? risk-heavy books can be illucative um you know because they require less upfront time and everyone has this idea
• 03:30 - 04:00 of converting them into ongoing service clients. However, they could be riskier. Um again coming back to those demographics. I find in general that advisers are a bit obsessed with the multiple as a single factor. Um you know just believing if you can buy something for a lower multiple it's just all you know all around better. However, the terms of the deal can be as important and they also play a role in deciding the multiple. Uh, think about a book.
• 04:00 - 04:30 It's $250,000 of ongoing revenue, 50% ongoing, 50% insurance. Think about how the multiple may change depending on the terms of the contract. Um, what if you were to pay 100% up front and there was no clawback period? Or what if you pay 80% up front and there's a 12-month time where you can go back and, you know, claw back any revenue lost. What if it was vendor financing and you're only paying a 30% deposit up front, you're playing monthly installments, um, you
• 04:30 - 05:00 know, and the advisers around to help you bear down all those clients. Different things matter to different buyers and sellers. Like, if you can find a seller that wants a lump sum and you can pay a lump sum, you might end up negotiating a lower multiple. Um, but maybe you've got a person who's selling. Um, they're retiring and they don't need the money tomorrow. Uh, and they're happy to stay in in the business to help betting those clients. They may want the higher multiple, you know, more money over a longer period of time. And, you know,
• 05:00 - 05:30 that's going to reduce your risk, too. So, these are all the different factors that can, you know, um, play a part. Financing options, secured, unsecured, and more. Uh, one of the biggest hurdles is often financing the purchase. Before I go into different um options and before you get too far down the road, if you haven't already, it's time to do some maths using a multiple of 2.5 and a 5year loan period. Um have a look at the remaining cash flow, especially after you consider tax and other expenses.
• 05:30 - 06:00 You're taking on a bit of risk and you know, you don't want to find yourself marching uphill for the next 5 years. You need to have a healthy cash flow buffer for you to basically succeed with this purchase. and grow your business and then not just be drowning that whole time. Um, so one of the things I generally would say is you're looking for a finance time of about at least 10 years so that you have that healthy cash flow buffer. There's obviously other variables that come into play, but
• 06:00 - 06:30 making sure you've got healthy cash flow is really important. The first thing that comes to mind when it comes to getting finance for advisor does tend to be, you know, securing the finance against the book that you're buying. There are banks that will do it. Um, if you haven't heard of them, places like Trailblazer or Judo Bank um, actually do understand the recurring revenue businesses. Uh, they'll treat the client book as collateral. Things you want to watch out for there though will be high LTVs, high interest rates, and um, lower time periods. Some of these agreements
• 06:30 - 07:00 may ask for a tripartite agreement with your license, which generally shouldn't be an issue for you, them, or the license. Um, however, they could ask your ASL to pay your loan repayments directly from your revenue. Um, which again, it's fine. It's just something you need to uh check on. Be aware of the bigger banks like the big four. Um, they will do some of this business, but what we found is, what's a good way of putting this? Uh, they aren't as motivated if the loan amount isn't, you know, a million dollars plus. There are
• 07:00 - 07:30 some good benefits of doing secured loans against the book. Uh, one of the main ones obviously being that you can potentially get your personal assets out of the transaction. Um, but just up ask up front if they are going to ask you for a personal guarantee. Low do or unsecured loans. Some banks will do just generic business loans where they look at your B statements to see if you can afford the repayments. If you're just starting out, this may not be an option, but if you've been in a business for a few years and can show a profit, this can be a very simple way of doing things. Um, you're not linking it to the
• 07:30 - 08:00 book itself. It's the merits of the business that you're currently in. um they might have a you know we can do up to 300, we can do up to half a million. So it's not going to be a solution for everyone, but we found they can be a really good option um as an alternative. Vendor finance or a combination of you know vendor finance and loans is becoming more common. Um you know this is where you are able to give things like smaller deposits up front. the vendor may let you pay, you know, in monthly installments or, you know, you
• 08:00 - 08:30 know, a chunk different chunks of lump sums to pay the uh the loan off. Um, this can be really uh beneficial to you as the buyer. Um, you know, it's definitely something to look at. You just really want to just understand the terms of that agreement. Whichever option you go for, you're going to need a good broker. Uh, you know, going to one bank uh and being declined or going to a broker that just puts you in the two hard basket and tells you it's not going to work. I really just wouldn't take that as a answer. You should generally be able to get some kind of solution, some kind of financing. Um, I
• 08:30 - 09:00 would do that almost first before you start looking for the book so you kind of know what power borrowing power you've got. We use McIntyre Finance here in Brisbane. Uh, they've helped a bunch of our advisers get loans for books or refinance loans for books they've already got. Uh, give them a call, ask for Mitch, tell them that I sent you. Where to find books? Another large part of this process is finding an appropriate book to buy. I've seen advisers spend a lot of time in this area. Um, I'm talking months, if not years. If you're thinking about buying a
• 09:00 - 09:30 book, just be realistic about how long it could take to get um, you know, your financing and then find the book. It isn't a solution to a failing business. It's not going to solve your problem in a month or 2 months. Um, you know, you need to give it give it some time to really find the right book and, you know, bet it down. Uh, of course you've got brokers. You'll find them by googling them. There there are more than a few in the industry. Some of them will want you to pay a fee to be a part of their process. Interlicency referrals can be great. If you're under a group
• 09:30 - 10:00 with more than a handful of advisers, you know, like a a midsize group. Um, let them know you're looking. Talk to other advisers in the group and tell them you're looking. These can be some of the easiest because when you're within the same license, you just don't have as big of a transfer headache. To give you an idea, we have about 65 advisers and we've done maybe four internal sales in the last 12 months. Um, so yeah, they are again more common than you think. Industry word of mouth is another great one. It's a bit of work, but it can be a really great
• 10:00 - 10:30 resource. Talk to your local advice community, talk to your PDMs, uh, even just reach out to the advisers who are literally just in your area. The other thing I would say on this is it just can't be one email or one phone call. you know, I have people telling me they're looking to buy a book. Um, which is fine if I've got something on hand, but in 6 months time, the question is, will I remember them from that one phone call? Um, so yeah, you want to kind of keep on top of the people in your network. Um, if you're still looking, make sure they're aware that you are
• 10:30 - 11:00 still looking. We do think some of the best books are never publicly advertised. They are sold off market. So, it does, you know, pay to spread the word and and keep your eyes open. risks and due diligence. Buying a book is not just, you know, plugging revenue to revenue into your bottom line. Uh you're taking on relationships, compliance risks, uh potential liabilities. Uh so let's cover a few of the things you should be looking out for. Of course, the first thing everyone's worried about is client attrition. Uh are these
• 11:00 - 11:30 clients that you've just paid for, are they going to immediately leave? Uh that's why you would look at for looking for clauses like clawbacks within the contract. Compliance again as another big one. You know, has the previous advisor kept up on best practices? Are there any red flags in their advice files? Um, you know, something that you might inherent. You might think, hey, I didn't give the original advice, therefore it's not my compliance risk, which, you know, is correct from an S SOA point of view. But even if you, you know, you onboard some
• 11:30 - 12:00 of these clients and all of a sudden they start complaining about insurance they've missed or, you know, an SMSF that shouldn't have been set up for them, you are going to have to solve that problem and it is going to be extra work. Uh, an adviser who is a higher quality adviser doing more compliant work, you're just going to minimize some of those um headaches that, you know, they're going to come up, but you're just trying to reduce the amount they do. Revenue verification. Make sure you're happy with how the revenue is verified. um you know are they trying to sell you upfront fees or is it have they
• 12:00 - 12:30 just given you a random spreadsheet that they've made? You could ask their um their dealer group to verify some of the numbers. Service model fit. If these uh clients expect you know hightouch facetoface service and you're a fully digital adviser uh you might lose some of those clients. So making sure you know that whatever they've been promised and how you run your business there is at least um a large percentage of um you know correlation. Another good question is where do the clients originally come from? I see books which have been sold
• 12:30 - 13:00 multiple times. You know an adviser buys it you know they try to pull out the value and then they sell it and the cycle continues. Knowing where they came from is important. Fee increases. This is a tricky one to work out but you know you can just ask the question when was the last time clients had a fee increase? Did the adviser just boost all the fees, you know, and just just to pump up the sales sales price? Um, it's not a deal breaker. I think just knowing when that last fee increase can really help you work out the maths on, you know, what you think the book will be
• 13:00 - 13:30 worth in the next few years and what you can do to it. The finer details look not all the these things matter. Um, but knowing them can help, you know, spot skeletons. And when advisor ask us, you know, our advisor say, "Hey, can you help me do some due diligence?" These are some of the questions that we ask that they don't think to, which would be, you know, who is the adviser? Let's Google them. What dealer group are they on? Which groups have they been on? Is there any kind of history that we can pick up there? What software are they on? You know, what documents come in the files? And and what are you going to receive? Um where are they? Are they in
• 13:30 - 14:00 the CRM or they literally paper files sitting on a floor somewhere? Um you're not always going to be able to get all this detail up front, but the more you can the better. Um, and yeah, the point is you need to do your due diligence. Look at financials, you know, compliance files, client demographics, you know, just don't rely on an adviser that just gives you a spreadsheet. You know, that's not really a source of truth. You're looking for something else. Does the perfect book exist? I wanted to touch base on this because I talk to
• 14:00 - 14:30 advisers and it just it sounds like a great plan and it keeps coming up. They say, "Connell, I'm going to buy a book. It's going to be 100 grand of revenue, 200 grand of revenue, something that's small that they can start with. It's going to be an insuranceon book, and they're going to call them all, and they're going to convert them to ongoing service clients. It's uh, you know, foolproof. Uh, please don't waste 6 months or more searching for this unicorn. I'm not saying it's not out there, but I am saying that there's a lot of other advisers looking for that
• 14:30 - 15:00 similar um, thing. Um, beware of insurance only books because have they already been pilered? Um, also some of these smaller books, and it may not seem smaller to you, but it can be just generally, you know, a smaller book that's only 50 grand of revenue or 100 grand of revenue, bigger books who are who have a um, you know, a strategy to acquire, they can just go and pay cash for these. So, just be aware that, you know, if you're trying to negotiate some of these books or you're trying to, you know, move slowly and do your due diligence, that can be a factor that's going to hamper the negotiations if
• 15:00 - 15:30 there's just some other bigger business out there with a bigger checkbook. I know this is a a big purchase and it's a risky thing to do. You're just not going to get everything in your favor. The size, the multiple, the demographics, the term of the contract. Um, you should adjust your expectations on on some level. Um, just work out what your deal breakers are and aren't. Alternate strategies. We all have to do alternate strategies in our SOAs, or at least I hope you are. Um, now is the time to consider yours. What else could you do other than buying a book? Strategically,
• 15:30 - 16:00 you should think about this. But also, what if you just find you just can't do it? You can't get the loan. Uh you can't find the book, whatever it is. You know, going to plan B or plan C, uh will still see your business growing. This is just one example. I'm not saying you should do this. I'm just trying to use some numbers for you to think about what else could you do. So, what if instead of buying a $100,000 book at $375,000, which would leave you, I don't know, 8K of uh revenue per month, free
• 16:00 - 16:30 cash flow per month, what if you instead spent 5 grand per month, every month for a year on an organic marketing campaign? Let's say you spent 5 grand per month on Google Ads. To get that same free cash flow, you'd need to convert what's that 15 to 20 grand per month of revenue. Um, you know, there's obviously a bit more to it than that and you got to consider things like upfronts and ongoings and the value of your business, but there are legitimate legitimate other strategies out there like spending money on organic
• 16:30 - 17:00 growth as opposed to just spending a whole lot of money on a book. Okay, so that was just some highle points on a book purchase. You know, if I missed anything or you have any questions, don't, you know, don't be afraid to reach out to me personally. I do say this all the time. You know, the best resource for advisers is other advisers. You know, find someone else who's bought a book or if they've done a marketing campaign, you know, reach out to them. I think you'd be surprised on how much advisers are willing to share. Uh, and if you do like these videos and if
• 17:00 - 17:30 you've got any other topics you'd like us to cover, please, uh, let me know. Cheers.