Article August 24, 2020

Transferring clients to a new advisor: Case studies and lessons learned - Case #2

Case #2: Incompatible styles and points of view

Jean Dupriez, LL.L., DAE, Pl. fin.

Recently, I had an interesting case. A joint evaluation for the seller, a seasoned advisor I’ll call Denis, and the buyer, an advisor who I’ll call Émile, a young technophile. This is an ideal situation for an evaluator who’s job is to be completely objective.

Nothing seemed to stand out when I reviewed Denis’s exhaustive answers to the questionnaire. He even provided detailed tables extracted from the database he had created with the means available at the time.

My analysis, item by item, yielded a coefficient of 2.45. The clientele was worth, according to my calculations, 2.45 times the $94,000 in annual recurring revenue, i.e. $230,000.


Yes, but…

Denis didn’t agree with me. Around 1990, he had created his own database using Access software from Microsoft. He perfected it over the years. The tool was effective for his client management needs.
However, the transferability of these data to another program (such as Kronos, for example) was, in my opinion, unlikely. Émile would have to manually recollect everything in a current sofware.

In addition, some of Denis’s files were on paper, others computerized: all too common a situation among advisors nearing retirement.
To clarify, Denis was 72 years old, widowed; he was starting to becoming tired. The average age of his clients was 62. Note also that the recurring income of his office had been dropping each year for the last five years and the potential for development of his clientele was almost non-existent.

Émile was 36. He is a techie. His personality was the exact opposite of that of Denis.
Moreover, Denis was proud of the database he had created, which was undoubtedly very effective for his needs and given the tools available in 1990. He was quite sentimental about “his” database. There’s the problem!

“The heart has its reasons of which reason knows nothing,” wrote Blaise Pascal.

Denis’s tool is obsolete today. But since he created it himself, in his eyes, it has significant financial value. He estimated that his business block is worth at least 3 times the $94,000 of recurring revenue, or $282,000.

On the other hand, of course, Émile was on board with the 2.45 times revenue evaluation, a difference of $52,000.

Result: the two parties held fast to their respective positions and did not go ahead with the transaction.

Leçon à retenir

Denis should have accepted that his computerization had become “archaic” and, as a result, his business was drastically losing value. Some characteristics may be valuable for the seller but not necessarily for the buyer. Sometimes these factors are so sensitive they can cause the evaluations to deviate well beyond usual differentials.

Over his many years of experience with clientele appraisal, Jean Dupriez has seen transfers of client portfolios give rise to all kinds of difficult situations, ranging from frustration to disputes and even financial losses. 

He decided to share his extensive expertise with this topic in a series of articles that highlight real-life cases, some of which resulted in substantial damages for the seller and/or the buyer involved. Presented in the form of case studies, these stories are followed by a brief analysis and practical tips on avoiding common pitfalls.