How to Sell a Book of Business
When you sell a business that manufactures or sells physical products, it’s easy to see what you’re selling. But the business of a professional services provider isn’t based on products. It’s based on client relationships. So, how do you sell your business when its biggest asset is intangible? For financial advisors, insurance brokers, accountants, and other providers of professional services, the answer is often selling a book of business.
What Is a Book of Business?
A book of business is a list of all your past and present clients, their contact information, and the history and details of the transactions you’ve closed with them.
Any professional who trades on relationships might have a book of business. But it’s most often used by professional service providers such as:
- Financial advisors
- Accountants and CPAs
- Lawyers
- Real estate brokers
- Insurance agents
- Investment bankers
- Salespeople
Professional service providers use their books of business to generate leads and revenue. They compile information about clients to help them form and build relationships. The most successful books of business are more than a phone book of names and contact information. They also include:
- Demographics, like the age and occupation of clients
- Revenue the client has generated
- Personal tidbits like their birthdays or kids’ names and ages
- Notes about clients’ future needs
- Referrals from clients
- Assets under management, when applicable
Why Sell a Book of Business Rather Than the Business?
A business includes everything: the real estate you own or lease to operate the business, office equipment and supplies, employees, and marketing tools like logos and advertising campaigns. It’s a turnkey operation that a new owner can step into. As such, a business typically commands a higher sale price than a book of business.
But for some business owners, selling a book of business can be a better strategy. If your growth has slowed, and you’re not turning the same profit you once did, finding a buyer can be challenging. However, you might find a ready pool of potential buyers for a book of business.
A larger company, for example, might see your roster of clients as a more cost-effective way to increase its client base and yield returns faster than bringing in new clients one at a time.
Selling your book of business can also be a good strategy for entrepreneurs who don’t want to exit the business entirely. You might be able to retain some clients, while selling off the portion of your book of business related to service areas you’re no longer interested in.
Suppose you own an insurance agency that sells to other businesses and individuals. You prefer working with businesses selling workers’ compensation insurance and property and casualty insurance, but you’ve cultivated a significant book of business selling life insurance and home insurance to individuals. Depending on the non-compete agreement you strike with a buyer, you might be able to retain your workers’ compensation and casualty insurance business and sell off the book of business you’ve developed for life and home insurance.
Because selling your book of business doesn’t include your facility, marketing tools, or employees, you’ll be able to continue working and focus on the areas that are the most interesting for you.
Valuing a Book of Business
The formulas used to value a book of business are similar to those used for selling an entire business, although some providers use a formula unique to their service industries.
In general, a book of business can be valued using:
- A multiple of revenues, income, or EBITDA (earnings before interest, taxes, depreciation, and amortization)
- A market approach that looks at the sale price of similar businesses
A common formula used by CPA firms and real estate brokers is to value the book of business based on a percentage of total revenues after costs such as broker commissions are deducted.
Valuations, however, can vary based on several key factors besides the financial aspects of the business. The size of the firm, its location, growth rate, and profitability are all key considerations for valuing a book of business, as they are with most business valuations.
Your Book Should Show a Diversified Client Base
The diversity of the business’s customer base is significant when selling a book of business. If your revenue is concentrated with just a handful of clients, losing just one or two customers can significantly impact the bottom line. A book that includes several different customers and customer segments poses far less risk for buyers.
For example, a financial advisor with a few clients that generate most of the firm’s revenue is worth less than one with many clients holding a diversified portfolio of investment products.
Client Retention Is Key
Client retention is a crucial factor for valuing a book of business. After all, what good is it for a buyer to acquire a book of business if the clients don’t continue to use the services? That makes premium renewals very important for valuing an insurance book of business. It means that the age of the client base for financial advisors is critical (retired clients aren’t as likely to continue to purchase new investment products). And it adds scrutiny on the repeat business generated by a law firm or a real estate brokerage.
Using a business broker or a professional appraiser experienced in your industry can be especially helpful for valuing your book of business because of the unique elements in these valuations.
Getting Maximum Value for Your Book of Business
The sheer number of factors that come into play when you sell a book of business means that you’ll want to start planning your exit strategy sooner rather than later. In fact, it’s not unusual for sellers to start planning to sell their book of business two to five years before the actual sale occurs.
While you can’t control market conditions, you can positively impact your valuation with good planning.
Consider these strategies to help attract buyers and achieve the best price.
Optimize Your Online Presence
Today’s customers conduct much of their research online before making buying decisions. Use your website to provide information about your offerings and services. When applicable, allow customers to compare plans and offerings and purchase services online.
Use Technology
Digital tools like customer relationship management (CRM) software show not only your professionalism, but they also allow you to attract and retain customers. A good CRM will help keep track of your customers and your leads, prompt and automate email communications for selling and follow-up, maintain customer interaction records, analyze customer acquisition strategies, and help you cross-sell products.
Create Customer Retention Strategies
Focusing on the customer experience helps any business grow, and it’s even more important when selling your book. The value of a financial advisor’s book of business, for example, can rise or fall with a clearly defined client service model that tracks the frequency and type of client interactions along with other metrics.
To help ensure repeat and renewal business from your existing customers, acknowledge and thank them periodically for their business. Insurance agents might consider sending gifts when customers renew their policies. Real estate agents might send a housewarming present when sales close. Accountants might offer a free mid-year review to their most loyal customers.
Build a Referral System
Referrals and repeat business account for the majority of revenue for many service providers. Consider sending thank you gifts to clients who refer new customers. Highlight testimonials on your website, and remember to periodically ask your clients for referrals.
How You’re Paid When You Sell a Book of Business
The three most common methods of paying for the sale of a book of business are:
- Lump sum payment
- Over-time payment
- Earn-out method of payment
Which method you use depends on the agreement you reach with the buyer, but the way payments are structured can also affect the valuation of your book.
Lump Sum Payments
When you use the lump sum payment method, you’ll get the book’s total purchase price up front. This method is most attractive for sellers, but risky for buyers because they must pay the full purchase price before they can see how profitable the book is. To mitigate the risk, it’s not uncommon for buyers to lower their offer price when the seller requires a lump sum payment.
Over-Time Payments
The over-time payment method is just that. Buyers pay a percentage of the sale price at closing, and the balance is spread out over a specified period of time. Buyers might prefer this method because it allows them to pay for the book of business without taking on debt.
The over-time method is riskier for sellers because they must rely on the buyer to continue to make payments. However, as a seller, you might also be able to sell the note for the balance of the payment to a third party. You won’t get the full payment due, but you’ll mitigate the risk if the buyer defaults on the over-time payments.
Earn-Out Method
The earn-out method is most often used when buyer and seller can’t agree on a valuation. The buyer pays a percentage of the purchase price upfront, usually 60% to 80%, and an additional amount over time based on after-closing performance targets. If the predetermined performance targets are met, sellers can realize a higher purchase price for the book. Conversely, if performance targets aren’t met, the sale price will effectively be reduced.
How the Sale of a Book of Business Is Taxed
A book of business is generally regarded as an intangible asset, and its sale is treated as a capital gain for tax purposes. That means sellers will incur a lower tax rate on the sale of the book than if the sale included items treated as ordinary income.
However, the type of payout you receive can also affect your tax liability. Sellers will pay more in taxes when they get their sale price in a lump sum than they would if the payment is spread out over a period of five or ten years.
At the same time, there’s no way to tell whether tax codes will change in the future. If you’re spreading payments out over a long period, it’s best to check with a CPA or tax professional when negotiating a deal structure for your sale.
How to Find the Right Buyer for Your Book of Business
You can sell your book of business to a family member or employee just as you would sell the entire business as part of a succession plan.
But, if you don’t have a succession plan for your business, you’ll need to look to a third party to buy your book. In some industries, such as insurance or financial services, it’s common practice to sell a book of business to a competitor or a larger company. These potential buyers can often merge your customer list into their own and see a substantial revenue boost without incurring much additional expenses because their infrastructure is already in place.
While you can use your networking resources to find potential buyers, you might also consider using a business broker. Business brokers can tap into a much larger buyer pool and generate competition that drives up the sale price.
However, it’s important to remember that your customer base is built on the personal, long-term relationships you’ve established. When selling your book of business, communicate the transfer personally to help the new buyer retain your customers.
Take the first step in selling your book of business by signing up for a BizBuySell account. Explore the BizBuySell Broker Directory to connect with experienced brokers who specialize in selling books of business, ensuring a successful transaction.