Life of a Brokerage Firm <Part Three>

Life of a Brokerage Firm <Part Three> Ron Grossman and Ryan Griffeth conducted as series of interviews discussing the various stages of a brokerage firm. Interviews are presented here in Q&A form. The focus of part three is on the exit strategy, or lack thereof, and what firms who have formalized these types of strategies are doing to implement them successfully. <Industry Professional> Michael Coglianese, Coglianese, CPA How many firms do you talk to that have an exit strategy formalized? 10%. They all should have them. What would you advise a firm or broker who had an exit strategy but was unsure of how to execute it? Talk to an attorney and accountant who has experience in this area. It will be the best money they spend If a firm or broker does not have a non-compete or a transfer and assignment agreement in their contract what if any remedy is there? Not sure – this is a legal issue. What avenues exist for a Firm or Broker who wish to sell their book of business? Try to find an existing brokerage firm that is making money or a FCM to buy your book. From our experience there is a complicated sales formula on how much you will get paid. Usually it is based on retention of the accountant over a defined period of time. How does one value their business? It all depends. It can be 1.25 times annual sales or revenue. It could be a one time lump sum payment. But usually it is a small upfront payment and payments over time. Are their best practices for creating or executing an exit strategy? Not sure – ask your attorney What happens to a book of business if an exit strategy does not exist and a firm or broker retires? The business goes to the firm. Who really owns the book of business? Typically the broker has the relationship with the client and the client will follow the broker to a new FCM. But non-compete agreements are typically applicable and there could be a time delay of when a client can be solicited by a broker who moved. <Industry Professional> Marc Nagel, Consulting How many firms do you talk to that have an exit strategy formalized? I don’t think small firms ever have an exit strategy. People never foresee themselves as too old or too rich to work. And people just aren’t retiring like they used to. Small IBs rarely save enough to retire on. Do you know that at today’s interest rates you need 3-4 Million to earn $100,000 before tax. Besides being a broker is like having an annuity, you don’t have to do much and you can keep collecting for years. Who really owns the book of business? A book of business is based on a personal relationship. There is no legal contract. If you say to a longtime client that you sold the IB or you are transitioning out of the business, the client will view that as an opportunity to leave without violating his loyalty to you. How does one value their business? It is very hard to find a buyer for a book who will pay a lump sum. It is almost always a percent of what sticks around. Your business is worth a fraction of your cash flow. I would tell someone looking to sell to contact me or Grossman if they couldn’t strike a deal with their employees or FCM. If a firm or broker does not have a transfer and assignment agreement in their contract what if any remedy is there? An IB won’t have bulk transfer rights unless he negotiated them upfront. Having said that most FCMs won’t stop you if you want to move your book. You just have to do it on their terms. Who really owns the book of business? Nobody really owns a customer but the FCM at least has a contractual relationship with the customer. Just like in a bulk transfer, the customer always has 3 choices- 1. Close his account 2. Transfer it to a different FCM (broker) 3. Stay at the FCM with a different broker. It’s always the customer’s call. FCM don’t usually steal business, it is bad for their reputation. But if they wanted to they can always undercut you on price and also provide better service. <Brokerage Firm—Successfully Implemented Exit Strategy> Anonymous How long have you been in the business? I started in the farm advisory business in the early 1980’s. We became an IB in 1989 or 1990. How did you market the sale of business? I didn’t market it. I hired a younger person to work here several years ago with the intent that he would eventually buy the business. How long is the process of selling and transitioning your business expected to take? The business is “officially” sold. I will work for an additional two years with an employment contract. What type of legal documentation is needed for the transfer? I had an attorney draw up all of the legal documents. These included a bill of sale, a term sheet, a purchase agreement, transfer paperwork for the company name and logo. It took about six weeks to complete all of the paperwork once an agreement in principal was reached with the buyer. Were you concerned about confidentiality? I wasn’t very concerned about confidentiality because the buyer was an employee. I do suggest that anyone selling a business should be certain that potential buyers sign non-disclosure agreements. What role did the FCM play in this transaction? The FCM played no role in determining the sales price or negotiating the actual sale. Their only role was to implement the actual transfer of the IB to the new company. They also helped with the registration process with the NFA. How long of a transition expect to take place? Two years. Where there any regulatory or registration issues that needed to be overcome? There were no registration or regulatory issues. Did you use a formula from pricing the value of your business? I worked with my accountant to determine the selling price. We based it on a formula of 1.5 times annual gross income. This seems to be sort of a standard calculation for service industries with few or no hard assets. We also had the business appraised by a professional business appraiser. What stage of your career did you form this exit strategy? Very late. Like within a few years of expected retirement. Did you run into any issues or hiccups while executing your exit strategy? The biggest problem was finding financing for the buyer. Banks are reluctant to loan money for a business that is entirely blue sky with no hard assets to collateralize. The SBA (Small Business Administration) will work with banks on these types of transactions, but they can have very restrictive rules, including employment options for the seller. Banks will require a significant percentage of the purchase price “down” and personal guarantees. After going through this process what advice would you give to someone who is thinking about selling their business? You will need solid documentation of annual gross and personal income, including several years of personal and business tax returns, etc. You will need to be certain any buyer is qualified and will be acceptable to your FCM. Operating budgets will also be requested by lenders. Non-compete clauses will likely also be required. Did you have professional assistance ie consultant or attorney involved in forming the structure of this deal? Yes. I had both legal and accounting/tax advice on how to structure the sale and the payment.

Life of a Brokerage Firm <Part Three>

Stay Informed

Related Articles

Futures That Don’t Look Like Futures

Chairman Letter for February 2013

CME Group Market Data Fee FAQ Clarification