Buying a broker's book of business can drastically increase revenues, but only if the selling broker's customers make the transition. To ensure a successful outcome, key steps should be taken by both brokers before the terms of the deal are finalized. A variety of strategies can be implemented in the transition phase to make clients comfortable making the switch.

Perform Due Diligence

In the due diligence phase, the primary focus should be on the ability to retain clients once the selling broker leaves the business. To ensure a high retention percentage, the acquiring broker should learn as much as possible about the selling broker’s business and clients to determine whether there is a strategic fit. For example, if the selling broker’s book is comprised of senior citizens with conservative portfolios, a broker who runs the same type of business will have a much better chance at retaining those clients than one who executes high-turnover trading strategies for aggressive traders.

During this phase, meeting with a handful of the seller’s biggest clients may give some valuable indications on whether they will stay or leave after the transition phase is completed. There will also be a lot of documents to go over to ensure the business meets certain legal, financial and compliance standards. Hiring the services of an attorney and an accountant is essential for protecting your interests.

Determine a Price

The typical baseline for establishing a fair purchase price is the selling broker’s trailing 12 months of revenues. This amount is then broken down into recurring and non-recurring revenues. Recurring revenues like monthly trailers and management fees carry a higher value than, for example, a large non-recurring commission paid on the purchase of a variable life insurance contract. Additional factors that may be considered include the average age of the clients, client tenure, and annual growth of the amount of money under management.

After the consideration of these factors, a multiple of the selling broker’s trailing 12 months of revenues, usually between 1 and 3 1/2 times, will be agreed upon between the two parties. Payments usually are structured with an initial payment of 15 to 40 percent, with the balance paid in regular installments over the next 3 to 5 years.

Terms and Conditions

Buying a broker’s book requires many of the same documents and terms as purchasing a registered business. The final agreement will be in the form of a contract, requiring standard documentation including agreements on confidentiality, purchase and sale, and details on installment payments.

The buyer of the book should make sure the terms include a non-compete clause that defines a period of time during which the seller is prohibited from opening a new agency and soliciting clients that are part of the transaction. The buyer also can add terminology that lowers the amount of installment payments if clients defect. Adjustments to installment payments should include the value of assets that are lost to defections. All documentation and language in the contract should be reviewed by an attorney prior to finalizing the transaction.

Working through the Transition

The transition period is a critical time for the buyer, but may also be important to the seller if the amount of the remaining installment payments is based on the percentage of clients who stay with the acquiring broker. To ensure a smooth changeover as well as a high retention rate, the selling advisor may assume a limited role in the transition period for up to 5 years.

It is during this period that client meetings are held with both brokers present to explain the transition and address any concerns they might have. After these meetings, consistent communication should be prioritized to increased the level of familiarity between the acquiring broker and new clients, which can be a key factor in keeping them in the fold.