What is it like to be wanted? To have your business model coveted by many eager buyers?
According to two of the leading M&A specialists in the advisory business — Echelon Partners and DeVoe & Company — the rate of merger and acquisition activity among wealth management firms continues to break new records. Both cite the flow of private capital into the advisory marketplace as the primary driver in the rise of transactions. (Reports are available via www.echelon-partners.com and www.devoeandcompany.com.)
Bubbles create ebullience. Aspirational buyers and well-funded buyers alike are popping to the surface, looking for opportunities. Some experts believe that supply and demand dynamics will elevate purchase prices by great multiples — an exciting yet challenging notion for potential sellers.
The sale of their business may be the one and only deal firm owners make in their lifetime. Most owners lack experience in navigating such transactions, along with the accompanying scar tissue that would make them more cautious. Meanwhile many buyers, particularly the consolidators, are adding to their know-how with each purchase. In negotiations, the advantage goes to experience.
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Current owners should remember that they do have leverage, however. If they own a solid business with a strong team of people and a loyal client base, they do not have to sell for economic reasons. Most firms these days are generating positive cash flow, increasing compensation to owners and employees, and enjoying a demand for their services.
Like most entrepreneurs, successful advisors still fear that one day their ride will end, either voluntarily or involuntarily. These nagging doubts complicate a transaction for many reasons:
Emotional attachment: Perhaps the hardest thing for entrepreneurs to surrender is the feeling of control.
Small business owners know that “control” is an illusion, but being in charge of your own decisions and defining the pace at which you work, the people with whom you work and the clients you want to serve is quite liberating. This freedom can change once you introduce a partner — let alone a majority owner — into your business.
Financial benefit: Simply speaking, the value of a business is the present value of future income.
Advisors typically believe that income will rise at a greater rate than what buyers estimate. Sellers also believe a higher price should be paid than what the terms and conditions in the purchase agreement ultimately allow. In addition, sellers may agonize over the possibility that the value of the company will skyrocket in the next few years, which would mean leaving millions on the table if they sell too early.
Employee impact: Many advisory firm owners do not think that their employees could pay fair market value for the practice, yet they still recognize the need to take care of those who have helped the firm grow. Owners worry that loyal employees will not be treated with the same respect, compassion and opportunity once management changes.
Client service: Most buyers want advisors to continue working for a period of time to ensure that the client base transfers.
Yet the sale of a practice represents a point of finality, indicating that advisor-client relationships will not continue forever. Dedicated financial professionals experience great angst as to how their loyal clients will be treated under new management.
Client loyalty: On the flip side, the prospect of a sale also can create painful uncertainty over whether clients will stay with the firm once management changes hands. Firm owners know that the loss of key clients will diminish the practice’s value for the buyer and compromise the terms of the deal.
The list of anxiety-inducing concerns goes on. Fortunately, prospective sellers can begin to mitigate these risks before they enter any conversation to sell. Next, I’ll offer some basic considerations for every advisory firm owner, whether you are 10 months or 10 years from a big liquidity event.