From the June 2005 issue of Investment Advisor • Subscribe!

The Tripping Point

There are more important questionsthan, "How much is my firm worth?"

In Malcolm Gladwell's best-selling book, The Tipping Point (Little, Brown and Company, 2000), he explores the phenomenon of "social epidemics," those wild, raging trends which are triggered by a series of interconnected events. Pok?mon, the South Beach Diet, and American Idol, are just a few of the most recent. Suddenly, and for many of us inexplicably, these epidemics grab the public's attention, becoming wildly popular, financially successful, and an undeniable part of our culture.

Social epidemics can also take place in smaller cultures as well, even in the financial planning community. In fact, it seems to me that we are on the verge of just such a phenomenon in the realm of advisory practice sales.

We're Not Immune

Evidence that such an epidemic is emerging in our own back yard is widespread. Consider the following:

  • Last year, Schwab Institutional introduced its new practice transitions initiative (disclosure time: with my help), conducted a series of workshops throughout the country, and dedicated a staff to manage the process of listing practices for sale on their web site.
  • Fidelity Registered Investment Advisor Group responded with its own program earlier this year.
  • At a recent conference for elite advisors sponsored by JP Morgan, four speakers (myself included) addressed issues related to the inevitable consolidation of practices.
  • Led by chairman and CEO Jessica Bibliowicz, National Financial Partners, the most successful consolidator yet of financial planning and other advisory practices, had a very successful IPO that was, until recently, also well supported in the aftermarket.
  • There have been multiple announcements of banks in the hunt for or having consummated transactions with advisory practices.
  • Berkshire Capital, which is one of the most widely recognized investment bankers for the securities industry, has been moving downstream into the mid-side wealth management market and is now appearing regularly at independent advisory conferences.
  • New roll-up firms are appearing on the scene, or are rumored to be on the scene already (this, by the way, could be a technical indicator of what's happening in the market, since the last time we saw these numbers of buyers was before the Millennium Market Crash).

Rumors and Truth

The strongest indicator that something big is in the air is the frequency with which some of the biggest names in the profession are rumored to be either buyers or sellers of practices these days. For example, one such big name--Ric Edelman--announced May 10 that he had sold his Fairfax, Virginia-based Edelman Financial Center practice for about $128 million to Sanders Morris Harris Group, the Houston-based financial services firm founded by the former head of Prudential Bache and E.F. Hutton, George Ball. What's more, some of these rumors have even turned out to be true. Our investment banking group at Moss Adams is currently working on four prospective transactions involving wealth management firms. On average we receive about three calls a week from advisors who have been approached, and so are seeking advice about what to do.

I see at least two driving forces that could trigger a social epidemic in the advisory world. First, practice economics--which currently encourage advisors to leverage themselves with professional associates and a cadre of support staff--creates a powerful case for consolidating firms and gaining economies of scale. Second, advisors nearing retirement age fear missing an opportunity to substantially boost their nest eggs.

While both are certainly compelling motivations for considering a sale or merger of a practice, I'm becoming increasingly concerned that owners of wealth management and investment advisory firms will let emotion rather than logic rule their decisions. Naturally, all of this activity is stirring up considerable excitement, and not a small amount of anxiety as well. The question in my mind is whether advisors who are being approached are asking the right questions themselves.

Almost without exception, the first question we are likely to hear from an advisor is "What's my practice worth?" While that's a good question, and ultimately, the right question, it is usually the wrong one to ask first. When emotion comes into play, however, it's the one that is top of mind for most folks. Of course, it's a difficult question to answer, even when it's asked at the appropriate time, because each firm is unique and has its own value drivers, and each buyer has his own motivations for mergers or acquisitions that may affect the price and terms it offers. So to reach an accurate answer often entails considerable research.

Step Back a Moment

More importantly, though, advisors need to step away from the precipice for a moment, to focus on their own situation, and then that of any prospective buyers, and ask more relevant questions than "what's the value." Here are some things you might consider: If you sell to a particular buyer, will they want you to stay? If they want you to stay, for how long, in what role and for how much additional pay? What will you get in terms of future compensation and future opportunities? Will the sale allow you to focus on your unique abilities and interests or will it force you to function in a role you won't enjoy (i.e. managing and growing a bigger business)?

And if they don't want you to stay, what will you do? How much money do you want and/or need from the sale? Is the timing right in light of where you are in your career? What is your motivation for making the sale? Liquidity? To take some chips off the table? Boredom? Burnout?

There are also important business issues to address about the folks on the other side of a potential transaction: What is motivating the buyer to want to acquire your business? If it's a consolidator, how compatible are the other firms that they are rolling up? If they are offering stock as part of the offer, is this a company that you want to invest in? Will the sale or merger help you solve your internal management and client succession plan or does it simply lay off that problem on somebody else? If you're going to stay active in the business and the business is growing, does the deal make economic sense?

Not the Last Plane to Heaven

One of the more sensational elements of this social epidemic is that both buyers and sellers have a false sense of urgency, as if failure to come to agreement means they'll miss the last plane to heaven. While it's true that M&A windows open and close, they are always ajar for the well-managed practices. Practices that have a clear strategy, strong profitability, systematic growth, built-in leverage and capacity and an attractive client list are always swatting down suitors like flies.

One advisor put it this way: "It's weird, I feel like I'm giving off inappropriate signals. I'm happily married but I keep getting hit on." As guilty as one may feel about the temptation, there is nothing more flattering than to be sought after. But eventually, I suspect, it gets old and annoying and not worth even a raised eyebrow. Just ask Angelina Jolie. That's the point owners should try to get to--the stage where you have both the emotional and financial security to walk away from any deal that doesn't fit your profile. And that confidence will be apparent to any buyer, and only make them want your practice more.

If one is contemplating a transition within five years, it's a good idea to begin thinking about what that afterlife will look like, and how the business transition will help you to get there. Will it provide the cash, or the resources to grow even further? Will it allow you to focus on only the things you want to do from that point forward?

In the meantime, when someone is waving a check under your nose, it's very difficult not to be seduced by the idea of instant liquidity, and in some cases, that final piece of your financial independence. But in case after case, we consistently find in the negotiations process, that for most advisors, it truly is not about the money. Advisors remain concerned about what they will be doing, how their staff will fare, how their clients will be looked after. Usually these concerns indicate that they have not yet resolved the timing question as to when to exit from control.

It's Not Just Money

So how much money is enough to compensate you for this loss? And if you get it, will you still feel fulfilled? And for the relatively young advisors (under 60), will it be a sufficient amount to free you from worry for the rest of your life? (For a closer look at some of the emotional implications of selling or retiring from a practice, see Olivia Mellan's column, "The Secret of My Succession".)

The decision to transition will inevitably come, either voluntarily or involuntarily. In the meantime, it's best to prepare your business strategically, organizationally and financially to maximize your options. If your ultimate transition goal is not maximum value, but optimum terms of the sale, then it's important that you position your firm as attractive to a number of individual buyers you like as it is to a strategic buyer who will offer you more money but probably less fulfillment. You may still choose to sell to the highest bidder, but at least you'll have had a choice, and will have considered all of your options with both your clients and staff in mind.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. You can reach him at mark.tibergien@mossadams.com.

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