Choosing a buyer for your advisory practice should be a piece of cake. The number of buyers vastly outnumbers that of sellers, so you should simply sell to the highest bidder, right?
In most cases, that would be a costly and irreversible blunder, because much of the value of the deal comes in back-end payments. Thus, advisors need to do the due diligence to be sure that a potential buyer can live up to his or her promises. Once an advisor sells a firm or practice, there are no “do-overs.” You have to get it right the first time, because your retirement nest egg is riding on it.
Selling an independent advisory practices typically includes earn-outs, which are based on back-end performance ranging from 50% to 70% of the total deal or sale’s price. At the wirehouse firms, the entire deal is back-end based. Earn-outs are paid via a mix of cash, equity and interest-bearing notes. Down payments are often 30% to 50% of an agreed upon value.
“It has to be a win for all of the parties–the seller, the buyer and the clients themselves. Their interests must be aligned,” says Mark Penske, chairman of United Advisors.
How does a prudent seller select a buyer who is most likely to deliver both the back-end performance and positive client experience required? In a series of three blogs, we’ll get the answers to those questions.
Matt Brinker, senior vice president of partner development and acquisitions for United Capital, explains: “As a part of United Capital doing 40-plus transactions, I’ve learned that the three most important things in choosing the right seller/buyer are culture, culture and culture.
“All of the strategizing, white boarding and legal agreements can quickly become moot when something doesn’t go as planned or life happens and the quality of people behind the transaction can become incredibly important,” Brinker emphasizes.
Here are six important factors that experienced deal-makers recommend sellers consider when sizing up prospective buyers:
Factor 1: A buyer who can improve your practice
Sometimes a buyer can help develop the acquired practice by offering additional products and services. The buyer may have superior client service or infrastructure capabilities that can facilitate a firm’s growth.
If so, this enables the seller to deliver more value to clients and to attain a bigger back-end bonus. After the sale, the client experience must be at least as good, if not better.
Factor 2: Compatible investment programs
What investment philosophy and structure is the advisor sharing with his clients?
If an advisor works with client through a broker-as-portfolio- manager format using mostly ETFs, he or she is probably not a good fit for a practice that extensively utilizes separately managed accounts (or SMAs) and alternative investments. ETF aficionados often take a dim view of active managers.
Optimally, the buyer’s clients should be utilizing similar products and should be accustomed to a similar, if not an identical fee structure with that of the seller.
Plus, any proposed changes in product offerings or client fees should be discussed upfront prior to the transaction. For example, if the seller’s clients have been taught to view financial planning as a free perk and the buyer wants to charge for this service, this needs to be addressed.
Factor 3: Compatible client profiles
It’s helpful if the buyer is servicing clients of the same demographic groups and with similar investment needs as that of the seller. If retirement planning for individuals or corporate 401(k) plans is a big part of a seller’s business, then the buyer must be knowledgeable in these areas as well.