When buying or selling a practice, personalities count as much as multiples.

If you've looked into the sale of your practice-or even just daydreamed about it-then you've undoubtedly thought about such things as down payments, earn-outs and multiples of revenue.

In fact, a recent report by Tiburon Strategic Advisors, the Tiburon, Calif., research firm, entitled "Trends in Succession Planning, Firm Valuations & the Growing Acquisition Market For Financial Advisors," tells you just about everything you need to know about negotiating a transaction. It lists the steps of signing a confidentiality agreement, reviewing financial statements and client base, negotiating a price, drafting a letter of intent, completing a legal document review, determining an appropriate purchase methodology and, finally, drafting a definitive purchase agreement.

What Tiburon's report doesn't discuss, and what is seldom talked about regarding these transactions, is the buyer's and seller's personalities. A successful transaction isn't simply a matter of finding someone with the right amount of cash, consummating the deal and walking away. We're talking about selling clients, so the buyer has to be able to win trust and transfer relationships. Conversely, the seller must be able to let go of relationships that may date back a decade or more.

Here's the deal: Most small- to medium-sized practices change hands by earn-out. The buyer puts money down and the rest of the purchase amount is expressed as a percentage of revenues for "X" number of years. The other critical element in these deals is the requirement that the seller remain involved for some period of time, usually at least a year.

Suppose I'm the seller. You, as the buyer, are going to give me $75,000 down, and 65% of my firm's $250,000-per-year revenues for the next three years, resulting in a multiple for the entire transaction of 1.86. To preserve this multiple, I ask for an employment agreement as well. After all, I'm going to spend my time assisting you in transferring the relationships. If I'm not paid for this time, then my multiple could, in reality, be much less than 1.86.

Brace yourself. According to David Grau, president of Business Transitions LLC, employment agreements are not the norm. The seller's help in transitioning clients over the subsequent year will be included in the purchase price. So, if I'm not getting any income for my continuing involvement, I want to be sure I find a buyer who has more than just money. He's got to have a personality my clients are going to love, and an aptitude for business and for planning that suggests he can move things along rapidly. In fact, looking for these traits-now that I understand how the game is played-is at least as important as establishing the financial terms I want.

But how does one do this? Appraising other people is one of the hardest things we do in business, or in life, for that matter. Let's find out how two successful sellers and one less fortunate buyer dealt with these issues.

Stu Shiroff, 32, had a brief but successful experience as an advisor working under several broker-dealers before starting his own company in 1999. In 2002, an opportunity presented itself in his family's business, a New Jersey retailer of men's and women's apparel. "I enjoyed financial planning, I was good at it, and I'd built a fair amount of assets under management," says Shiroff. But the family business became a stronger calling.

Working through FPTransitions LLC, an affiliate of Business Transitions, Shiroff received 50 inquiries about his practice. The buyer he ultimately chose was based in California, Shiroff's state of residence at the time. But more important were some buyer traits that matched Shiroff's ideal buyer profile. "I was looking for someone with a strong ethical background, first of all, and someone who would pose the least amount of change for my clients. In other words, someone who would be able to offer similar services as me, such as money management and estate planning, and would have the same BD in order to minimize the necessary paperwork."

Shiroff was so successful in his buyer selection that he closed the deal in November 2002, and he and his buyer had pretty much everyone and everything transferred by February 2003. Says Shiroff, "My involvement the last few months has been very limited." Sometimes clients will continue to ask for a selling advisor even though they may like his buyer; after all, they've had a long-term relationship with the seller and may miss his or her friendship and counsel. "Only a couple of my East Coast clients with whom I'd had close friendships continued to ask for me," says Shiroff.

Well over 90% of Shiroff's assets under management have transferred to his buyer at this point, and he's confident he'll maximize his total proceeds over his 2.5-year earn-out period. In order to duplicate his experience, heed Shiroff's advice: "Look for someone who's even better than you, can offer better service, has more knowledge, and who will do the right thing for your clients."

Jean and Bob Cummings, of Sequim, Wash., had a similar experience, except their process started and ended with SunAmerica Securities. They used FPTransitions solely for its assistance in providing necessary legal documents and closing the deal.

At ages 61 and 68, Jean and Bob found many of their friends dying or becoming disabled. With children in the Netherlands and Ireland and grandkids to see, they just wanted to travel. The Cummings' commission-only planning practice consisted of 900 accounts with SunAmerica, so what they sold was their book of business. They wanted to remain licensed and work under their buyer for four years, the length of their payoff.

So who's the buyer and how did they find him? He's 42-year-old Bret Keehn, a veteran of the brokerage business who, for the last ten years, worked two doors down from the Cummings in the office building they own. "We approached him," says Bob Cummings. "He wasn't a stranger to us. We knew he was a good person. We had observed him and discussed business with him from time to time. We knew he was up to speed on investing. He was an employee of his previous firm, so he'd had no ownership experience, but he has acquired that [working with us]."

Jean Cummings had read an article about FPTransitions but didn't figure they'd need any help. Their son was an attorney capable of drafting a purchase agreement. When they realized their son's retail orientation didn't lend itself to drafting a contract for an advisory business, they called David Grau at FPTransitions at the last minute for help. "He stayed with us for 36 hours, putting everything together, faxing papers back and forth, until everyone agreed and signed them. Everything in those documents is so clear that each party knows exactly what requirements it must fulfill," she says. All the paperwork was signed in early December 2002.

Then came the fun part: finding out if they'd made the right choice. "We had joint appointments with Bret, clients coming in every 45 minutes," says Bob. "We all looked over the clients' accounts, dealt with the new account forms the clients needed to sign, and got the working relationship with Bret moving forward. After several days, some clients wanted to bring in new money and they asked for Bret! Occasionally a client would call and ask for Jean or me, but not that many. No one's refused to speak to Bret if we weren't here and, because Bret's a nice man and very comfortable to talk with, he's establishing rapport with the clients quickly."

What did this experience teach the Cummings about selecting a buyer? Says Bob, "Look first for ambition. Bret has four children and a reason to get out of bed in the morning. He has a strong work ethic."

Kris Behn, owner of Fieldstone Financial Management Group LLC, has had the opportunity to experience this process from the other side-as the buyer. The first time around, he closed on a practice in May 2001 with a mature seller eager to get out but, at the same time, he was cognizant of what he had to do to maximize his value. Behn and his first seller worked together diligently for about 12 months, transferring systems, meeting with clients and successfully shifting the client relationships over to Behn. After that, the seller remained available for another year, but was rarely needed. He and Behn worked together easily, making a friendship as well as a mutually profitable business transaction.

Heady with the victory of his first merger, Behn tried to do it again in late 2002. "Since my first deal went so well, I assumed the second would also take a similar amount of time and go smoothly. My focus was more on getting the deal done than assessing whether there was any personal connection between me and the buyer. This turned out to be a colossal error in judgment on my part," says Behn.

Among many other differences, Behn is finding he and his second buyer (for whom we'll use the pseudonym "Jones") have very different ideas about planning. What's more, Jones' mentality and investment philosophy have been largely adopted by his clients. While that could have worked against Behn, he says, "I'm finding that coming in as a fresh person with new ideas is actually appealing to Jones' clients. I'm not telling them to go out and buy bags of gold and silver but to make investments that are a bit more traditional and comfortable for them." While good for his new client relationships, this switch in advice doesn't always sit well with Jones, who wants to remain active in the business and, Behn believes, has on occasion felt undermined by his different style.

What will Behn do differently if he gets a third chance at a merger? "I will take the time to talk confidentially with the employees of the firm, something I didn't do in this instance," he says. Behn now knows that, although two deals might be structured very similarly, the personalities involved can make their execution like night and day.

Our lesson: Ignore the human element in buy-sell transactions at your own peril-spend at least as much time analyzing personalities as you do the numbers.

David J. Drucker, MBA, CFP ([email protected]), a fee-only financial advisor since 1981, is co-author of the book Virtual Office Tools for the High-Margin Practice (Bloomberg Press, 2002) and editor of the Virtual Office News newsletter, both available at www.virtualofficetools.net.