How To Go Independent

An objective source to learn about independent business models

Do you like free money?

Sean KernanComment

If so, you may enjoy the latest episode of our podcast, which you can find here: http://howtogoindependent.com/htgi/episode54

I detail a business that I bought last year. The seller's practice that was 100% brokerage assets--that's right, notta one advisory account (the horror!). We were able to negotiate a mutually agreeable deal with the seller to put nothing down and pay him over 45 months. Even better, he was willing able to realize the value via 1099 income. As I told him, that made it a lot easier to pay his asking price because of the immediate tax deduction I get for those payments.

My monthly payment to the seller is $4,500--or $54,000 per year. That means my revenue needed to break even on cash flow is just $54,000 a year. The practice had about $15 million of client AUM. If we assume an average of a 1% per year advisory fee, I only needed to convert $5.4 million of assets to breakeven just from that...just over ONE THIRD of the client total asset base.

Even at a fairly conservative long-term revenue projection of $100,000 per year, think about the economics of this type of deal: if I work "for free" for 3 year and 9 months, I have a "guaranteed" additional $100,000 of net revenue. Do I need a little more staff support because of these 40+ new clients? Will I need to work more efficiently to serve them in addition to my prior clients? Sure--but the impact is nowhere near $100,000 a year!!

This deal could even be a template on how to get into the business as an advisor for someone who has done other roles in the industry (wholesalers, etc). Obviously, financially surviving the 45 months with payments must be considered---but if you double or triple the numbers above, voila! You have a viable independent practice.