Make Them Say Yes

Make Them Say Yes

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very sale of an advisory practice starts with a letter of intent (LOI). And if that letter isn't accepted, that's where the deal ends. But once the LOI is signed, 95% of deals go through.

There are strategies to ensure that happy result — if buyers plan their courtship of the seller carefully.

Basically an LOI crystallizes the rough terms of the transaction and lays the groundwork for ongoing meetings between the parties. It's written after a buyer and seller have seriously discussed the price, terms, and conditions of a deal, but before the purchase agreement and much of the due diligence are completed. Buyers usually have a pretty good idea of what a seller will accept before they submit an LOI.

If there are multiple buyers for the practice, most sellers will require an earnest-money deposit of about 1% of the purchase price. The deposit should be put in escrow or in an attorney's trust account. It's refundable for a limited period, such as 15 to 30 days after the LOI is signed. During this period, the buyer conducts a thorough due diligence and makes a decision. If the buyer decides not to go forward with the acquisition, he or she is entitled to a full refund of the earnest-money deposit. If the buyer completes the transaction, the deposit is credited toward the down payment.

If the buyer exceeds the due-diligence period and has not formally withdrawn the offer, he or she forfeits the earnest-money deposit. That's because a seller commonly expects that, once an

LOI is signed, he or she will deal exclusively with that buyer, who in return won't drag out the due-diligence period. A smart seller also will request proof of a buyer's ability to pay for the practice before signing on the dotted line.

While an LOI is mostly non-binding, it creates a moral commitment to complete the deal on the stated terms. So buyers and sellers need to coordinate the process with their attorneys to ensure that everyone stays within the LOI guidelines. When one party strays too far from the written understanding of the price and terms, deals collapse quickly.

Currently, it's a seller's market on Business Transitions' online marketplace for small practices. There are 30 inquiries and an average of three offers per seller. Before smart buyers can sign an LOI, they must grab the seller's attention. The best way to do that is not necessarily by being first to show up at the seller's door. The first offer often forces sellers to confront their fears about the reality of the sale. They're much more comfortable with the deal and what it means to them by the third or fourth offer.

When sellers are sorting through offer, a first hurdle is cultural. Buyers have to remember that the open market for practices isn't eBay. Sellers, as a rule, don't choose the highest bidder, but the buyer who best fits with the seller's personality and business philosophy. They want to be confident their clients will like the buyer and stay with him or her.

Another hurdle is geographical. Buyers must convince the seller that they will maintain some kind of local presence after the sale so the seller doesn't worry that clients will be neglected and the practice will fall apart.

About one in five buyers makes it past the first two hurdles to face the final one: terms. The down payment and the length of the payoff have as much to do with a successful sale as the price. Buyers have to be willing to put at least one third of the purchase price down in cash to gain $40 million or more in assets under management in less than 90 days, even if they have not met a single one of the seller's clients. If you want to escrow the down payment and pay as client-delivery benchmarks are reached, the sellers will feel like you're asking them to take on too much of the risk. After all, once the deal is closed, it favors the buyer, not the seller, because the buyer can pay the balance over time out of the business's revenues.

Prove that you can handle the acquisition. Introduce your second-in-command if you have one. Office managers, even receptionists, say a lot about you, your skills, your maturity, and your practice. They say that you can handle and work with people both professionally and administratively. Send a copy of your bank statement or otherwise demonstrate that you have the money to pay for the practice. Include a copy of your credit report in the same envelope so the seller doesn't have to ask. Sellers appreciate things like that.

Don't try to address every last deal term in a LOI. It is a non-binding agreement. Your purchase agreement may go faster and more smoothly if your LOI weighs in at 20 pages, but only because the buyer and seller will both be dead on their feet after the prolonged negotiations just to get the letter done. Sellers don't appreciate things like that.

Once an LOI has been written, add a cover letter and make sure to call before you fax the offer to the seller. Otherwise your perfect offer will inevitably be intercepted by an employee who delivers it to the boss/seller with a "deer in the headlights" look while mumbling about looking for a new job. This lack of tact will antagonize the seller. More important, by breaking the confidentiality of the deal, you risk costing the seller critical employees who may have been part of the package. Further, clients who hear rumors that their adviser is leaving them might bolt.

Involve spouses early in the process. A dinner meeting is great opportunity to put personalities front and center. It helps to remember what it's like dealing with your clients; financial decisions are often made by husband and wife together. Sales and acquisitions at the small-cap level are no different.

Buying or selling a practice is about real people and their needs and concerns--specifically, the seller's clients and their families. Too often, acquisitions and sales turn into a pile of legal documents, a list of names, an income stream, and competing offers. If the seller knows that your offer is genuine and competitive and that you understand the real goal of the transaction, you will win more offers than you lose.

Finally, don't be afraid to fail. Most successful buyers failed once or twice before their first offer was accepted. It takes practice--just like any semi-complicated task you perform for the first time. Stay with it and you'll eventually succeed. You could add $40 million in assets under management to your practice, perhaps as often as once a year. FP

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David Grau is president of Business Transitions in Portland, Ore., a leading facilitator of buying and selling advisory, accounting, and insurance practices on its Web sites: FPtransitions.com, RIAtransitions.com, CPAtransitions.com, NAPFAtransitions.com, and Insurancetransitions.com.

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