March 1, 2016 Comments Closed

12 Things You Should Know Before Purchasing a Financial Services Business

Posted by:admin onMarch 1, 2016


Over the next 7 to 10 years, there will be a steady stream of baby boomer business owners (of financial services firms) retiring from the industry, according to a study by LIMRA and McKinsey & Company (The 2012 LIMRA-McKinsey Experienced Financial Advisor Study, April 30, 2013, This will create a sales void for marketing and selling products. However, this also means that there will be a number of businesses for sale coming onto the market as owners cash in on the value they have created.

Acquiring a business can boost the total growth of your firm, particularly during a soft and competitive market condition.  I’ve seen both some great acquisitions over recent years and some mediocre acquisitions that did not live up to the expectations of the new owners.

One of the primary reasons why these business purchases do not work out is that the acquirer does not obtain detailed sales and marketing information from the seller. The purchasing owner is so excited at the prospect of purchasing a business and boosting their growth that they fail to dig deep enough. Instead, both parties are focusing more on the price (which is important) and less on discovering the sales and marketing story of the business.

To discover the true marketing and selling history of the firm, there are 12 facts and figures that you should obtain for a minimum of three years. These are grouped across the following three categories:

  1. Financial Performance
  • Revenue.
  • Operating profit.
  • Growth ratio. This is a quick tool to benchmark a firm’s performance. It helps frame the trade-off between growth and profitability. This is the formula: 1/2 of EBITDA margin + organic revenue growth.
  1. Operating Performance
  • Renewal revenue – Percentage of prior year’s revenues; the higher the percentage, the more favourable the result. This is impacted by attrition (loss or retention of accounts) and by changes in premium and commission levels.
  • New business – Percentage of prior year’s total revenue. The higher the percentage, the more favourable the result.
  • Acquired revenue – The percentage of prior year’s revenues for this area. The percentage indicates the percentage of acquired business (purchasing of another firm or book).
  • Organic growth – Growth in revenues from prior year, excluding acquired revenues.
  • Total growth – Growth in revenue from prior year, including acquired revenues.
  1. Productivity Performance
  • Revenue per employee – Net revenue divided by the total number of full-time equivalent employees. This measures the productivity of the firm.
  • Compensation per employee – Total compensation divided by total number of full-time employees.
  • Spread per employee – Total revenue per employee minus compensation per employee. This measures the dollars per employee available to pay all other expenses and generate a profit for the firm.

Below are some templates to capture and analyze this information.

Financial Performance
Statistic Year 1 Year 2 Year 3
Operating profit
Growth ratio


Operating Performance
Statistic Year 1 Year 2 Year 3
Renewal revenue
New business
Acquired revenue
Organic growth
Total growth


Productivity Performance
Statistic Year 1 Year 2 Year 3
Revenue per employee
Compensation per employee
Spread per employee

Sadly, I see too many new owners who discover this information after the purchase, when the horse has already bolted. While their attention is focused on fixing and merging the new business, the productivity, performance and profitability of the main business suffers.

The solution

Before you hand over the cheque, conduct an audit to review and benchmark the business. Ideally, this should be someone independent, as you may simply be too close to the action and not objective enough, and too excited about purchasing a business.

Unless your accountant or advisor specialises in the financial services business, they may not be the ideal person (some struggle with selling intangible services).  Also, if you’re able to compare and benchmark the findings, that’s a bonus. Industry statistics are available to compare results with the industry average and with top-performing firms.

Recently, a firm asked my advice about a financial business they were considering purchasing. After conducting an audit and benchmarking the performance, I recommended the firm save its money and instead focus on improving their internal capabilities to drive organic growth.

Ask before you buy. Just because a business is for sale does not mean that it’s a good investment.

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