By Cristi Meyers
When it comes to selling a practice, there are a few general factors that nearly every advisor realizes will go a long way toward shaping a fair valuation. One is revenue. A practice that both has strong, growing revenues and keeps expenses in check while investing in the business is typically an attractive acquisition target.
Another is client demographics. It’s improbable that a practice made up almost entirely of retirees in the distribution phase of their lives would yield much on the open market. Conversely, one that has a higher concentration of professionals just beginning to enter their max-earning years is likely to fetch a high multiple.
Also, there’s perhaps the most critical M&A consideration of all: service continuity. When a seller is not incentivized to take an active, hands-on role in the transition, it’s easy for them to become apathetic, which means many of their longtime clients are a flight risk. After all, why would anyone allow somebody else to pick out a faceless advisor for them when they can do that themselves?
Again, generally speaking, almost every independent advisor appreciates how these components influence the sale price of a practice. What about some of the things that many don’t think about as often, but, cumulatively, have the potential to play just as big a role. Here are seven M&A considerations that are a bit more under the radar:
- Does the practice have a history of regulatory problems? Like it or not, many investors today continue to view our industry through the lens of Bernie Madoff. And while his misdeeds aren’t all in keeping with how the vast majority of advisors serve their clients, it’s the reality we live in. Investors are hypersensitive to compliance issues, meaning any practice without a clean regulatory track record will likely have a hard time realizing its full value—especially if it has been cited within the last five years.
- Is there a framework to attract young people and retain management teams? Many independent firms struggle to attract young professional talent. Practices that have robust bonus pools and stock ownership programs have an easier time confronting this challenge, and as an added set of benefits usually experience more stability and suffer less turnover, all of which boosts the value of a business.
- Are there non-competes with employees? While most advisors conduct quarterly and yearly client review meetings themselves, we’re beginning to see more and more outsources that are tasked to CFPs and CFAs working as W-2 employees. The potential problem with that approach is that as those professionals establish ties with clients, they become the de facto point person, making it easy for them to poach those relationships were they to move on and join another team or establish one themselves.
- What is the ownership structure? Though many independent practices are structured as sole proprietorships, forming a limited liability corporation or a corporation that allows advisors to build longer-lasting, multigenerational businesses, which not only tend to be far more attractive on the open market but open up the possibility for internal buy-sell agreements. In addition, these structures also provide an extra layer of protection between advisors’ personal and business assets.
- Is there an interim continuity plan? Not only do clients want to know that there’s a plan in place were something to happen to their advisor but so would a buyer of that business—whether that’s because of a catastrophic weather event, a cyberattack or major medical emergency. Long-term disruptions, almost inevitably, provoke client attrition. It’s less of a matter of if and more of a question of how many. A clear and well-executed continuity plan can help to limit the damage.
- What is the average length of each client relationship? Enduring, long-term relationships are likely to breed a high level of trust. And when a client trusts their advisor, they are more inclined to follow their advice and remain in the care of the acquirer, increasing both the seller’s earnout and the return on the buyer’s investment.
- Do a small number of clients make up a disproportionate percentage of the practice’s total assets under management? While every advisor likely has a few anchor clients, any time a practice is overly reliant on a few relationships, it means one departure could have an outsized impact on the entire business, in some way mirroring the risks investors assume when they have too much of their money in one stock.
Preparing a practice for a sale is a monumental task that takes years to complete successfully. But at the same time, it’s also a byproduct of having a strong business, from top to bottom. Because of this, advisors should be able to rely on their broker/dealer to act as an enabling partner.
Indeed, isn’t that, at its core, the raison d’être of every independent firm: to help advisors run smooth and efficient enterprises? However, far too often the only “support” b/ds offer in this area is limited to facilitating in-network transactions that allow them to retain assets. But that’s self-interest masquerading as support.
If a b/d doesn’t have the tools and expertise available to help advisors with many of the issues posed above to guide them during the years-long process of selling a practice, it’s falling short in a critical area of their business of being a true partner.
Cristi Meyers is a practice management consultant for ProEquities.
