Advisors planning to retire have several critical choices to make if they want to cash out and have their business continue: They can sell their firm to an outside company or to one or more insiders who will stay on. They can get paid in cash or equity or a combination of the two.
But well before making any of those decisions, advisor-owners should consider what their firm values most — growth or profitability — and what services it offers clients, such as proprietary investment management or open architecture investment management.
These characteristics can affect their ability to sell as well as the price they’ll receive, according to Mark Tibergien, CEO of Advisor Solutions at BNY Mellon’s Pershing and a longtime Investment Advisor magazine contributor, and Dan Seivert, the CEO of Echelon Partners.
The two executives debated what matters most when considering a merger or acquisition at Pershing’s recent Insite conference in Orlando, Florida, taking opposite sides for purposes of a lively discussion after which audience members could cast their own votes for either position.
Keep in mind that M&A activity among RIAs is on the rise. In 2017, a banner year, the number of deals increased 22% from the prior year to a record 168, and the average assets under management of acquired firms topped $1 billion for the second consecutive year, according to Echelon Partners. The firm projects 196 deals this year.
Here are the issues advisory firms should keep top of mind when considering a merger or acquisition, according to Tibergien and Seivert.
1. Prioritize Growth Over Profits?
“Think of value as a function of the future, not the past,” said Tibergien, who argued that growth trumps profits when valuing an advisory firm because growth suggests the future potential of a firm while profits and revenues record the past.
He favors the formula: EBITDA/(Risk-Growth) = Value. The higher the risk, the lower the value and vice versa, said Tibergien.
Growth is especially important in the current environment where many firms have aging advisors and clients. Buyers want to avoid acquiring firms whose client assets are shrinking due to decumulation, rather than growing from accumulation, Tibergien explained.
Profitability, along with cash flow, is also an important consideration, said Seivert, because it reflects the quality of a business, including its cost management capabilities. Advisory firms interested in a merger or acquisition should exhibit both profitability and growth, he said.
The audience chose growth over profitability by a slight margin.
2. Offer Investment Management That’s Proprietary or Open Architecture?
If investment management is a core proposition of an advisory firm it should own it because that will yield higher revenues, but in the current market, financial planning is a more valued offering, said Tibergien.
As a result, more firms now offer asset allocation services and outsource investment management rather than maintaining it in-house, which costs money for research staff and time, said Seifert.