One of the ironies of the advisory business--an industry built on the wisdom of seeking professional advice--is the reluctance of many advisors to retain professional counsel to address issues outside their expertise. We see this most frequently when advisors are making one of their most important business decisions: the sale of their practices. I'm basing this observation on the frequency of calls we get from advisors asking if they think the offer they got from a prospective buyer is fair. Unfortunately, that's like asking if the premium on a universal life policy is fair: in both cases, there are a lot of factors that go into a fair price, and if you've gotten this far into the discussions without help, it may be too late to get a good deal.
Their reluctance to seek assistance early may be because of the confidence advisors have in their own ability to evaluate financial matters. That said, I suspect a more common reason is "feesophobia," meaning the fear of spending money on professional advice when they are not certain if a transaction will get done. Unfortunately, just like clients who think they can manage their own wealth without professional advice, many advisors fall into a trap that may cost them many times more than the money saved by not hiring an expert.
Most advisors are intimately involved in only one sale of a business during their careers: their own, but as with any skill, the ability to successfully joust and parry in negotiations is greatly increased with experience. Experienced dealmakers know that the vast majority of the value in a transaction resides in the terms, not in the price. By not understanding how those terms affect value, advisors can leave a good six or even seven figures on the table.
As it turns out, there are often 15 or more deal points to resolve in a sale, merger, or acquisition [see sidebar]. Perhaps the most daunting challenge for advisors who eschew professional help is that they fail to anticipate their own emotional involvement in the sale of a business.
Determining the correct type of professional counsel to engage for assistance in mergers, acquisitions, or sales of financial advisory businesses depends on size of the business and the nature of the contemplated transaction. The choices range from engaging an investment banker, to working with a business broker, to seeking hourly consulting advice from CPAs, lawyers, appraisers, or other consultants.
Easing the Transition
In the late 1990s, leading broker/dealers such as SunAmerica Securities (now part of the AIG Network of B/Ds) and Mutual Service Corp. developed Web-based platforms for their registered representatives to sell their books of business. Others developed written manuals to guide their reps through the transition process.
Since then, other broker/dealers and custodians have implemented their own initiatives to assist advisor clients in the process of buying and selling a practice (I have been involved in some of these initiatives.) Schwab Institutional has created schwabtransition.com, a Web-based listing platform provides referrals to bankers and consultants, and helps buyers and sellers off-line to match up with each other. Fidelity Registered Investment Advisor Group (FRIAG) also has introduced a transition initiative for its RIA customers. Like Schwab's, the program offers access to professional resources but does not include a Web-based listing service. TD Ameritrade is also embarking on a succession initiative for its affiliated advisors though as of this writing, the program has not yet been fully developed.
The Investment Bankers
The leading investment-banking firms for financial advisory businesses valued at more than $10 million are Berkshire Capital and Cambridge Partners. DAK Associates, a firm based in Pennsylvania, has targeted the market slightly below that size. Prominent investment bankers such as Putnam Lovell NBF Securities, Inc., Goldman Sachs, Merrill Lynch, and Lazard Freres serve the high end of the RIA and broker/dealer market.
Investment bankers will represent only one side of the transaction and most prefer to work on behalf of the seller. That's because sellers tend to have a higher motivation to complete a transaction and it's generally easier to find buyers than it is to find sellers. This, of course, increases the probability of investment bankers' getting paid for their efforts.
Most investment bankers receive a retainer and progress payments to cover their costs during the process of preparing a "book" (a profile of the seller's business) and seeking prospects. Monthly retainers can range from $10,000 to $50,000. Often these retainer fees do not offset the success fee. They are regarded as part of the cost of planning and searching. The success fee typically ranges between one percent and three percent of the purchase price, depending on a variety of factors including the size, complexity, and scope of the engagement. Some investment bankers have a minimum fee upon closing, so it's important that you judge how well they can add value to the transaction.
The banker also works closely with the seller to understand the culture and philosophy of the firm. A good banker will get the initial list of potential buyers down to six or seven target firms to engage in a discussion about the sale. From that list, it elicits firm expressions of interest before it goes any deeper into the discussions and negotiations. To encourage bidding and a better deal, the banker generally keeps several prospective buyers moving along at the same pace. Ultimately, the banker together with the client will decide on one firm with which to negotiate in earnest.
That's the point at which the investment banker delivers some of its greatest value. The intermediary's ability to help the seller negotiate the fine points in the letter of intent--and the purchase agreement--can considerably increase the money going to the seller. Throughout the negotiating process, the seller should expect frequent communication from the banker and see material progress within three to six months. The sale of a large advisory firm takes time, necessarily, but events can move fast at certain points in the process.
The Pros & Cons
With an investment banker, you're hiring someone who is typically unemotional about the deal and motivated to help his client get the best deal. In evaluating offers made to four separate advisory firms by a consolidator, we saw that those who engaged an investment banker to assist them received a better offer and a better contract than the two that did it alone. Although this is a very small sample and anecdotal, the parallel for financial advisors is clear. As the millennium market crash proved, investors who did not consult their professional advisors tended to do worse than those who were guided by experienced and skilled investment managers, wealth managers, and financial planners.
One circumstance where it may not be necessary to engage an investment banker but rather work with an attorney, accountant, or succession consultant would be for internal transactions. In these cases, the issues that arise may involve how to prepare the successors for operating the business as well as for acquiring ownership. In addition, it may be necessary to build a partner track, a valuation formula, and a career development plan to ensure continuity of the enterprise. Advisors in these circumstances rarely if ever charge a success fee but often will charge project or hourly fees for their work. [Conflict of Interest Alert: Yes, this is something my firm offers.]
Most people get to buy or sell a business only once. Although they may have been adept at the management of the practice, they face considerable risk in negotiating a deal without at least the help of a competent and experienced attorney and CPA. But as the deals get bigger, it becomes even more prudent to engage a professional mergers-and-acquisitions advisor who's experienced in the art of deal making. Such professionals aim to consummate the transaction in a way that fulfills the goals of the person they represent--whether that's a buyer or a seller.
Mark Tibergien, a principal in Moss Adams LLP, is chairman of the firm's Securities & Insurance niche. A nationally-known consultant to financial advisors, he is the co-author of Practice Made Perfect, available through the IA Bookstore. E-mail him at email@example.com.