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Practice Management > Succession Planning

Time to Sell or to Grow?

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What You Need to Know

  • M&A activity substantially increases in bear markets.
  • To gain the maximum amount of growth, firms should double down on organic growth and improve client service.
  • Selling should be based on a timeline that fits your firm's objectives, not on what the rest of the market is doing.

When’s the right time to sell an advisory firm?

It may not be immediately apparent, but trends in organic and inorganic growth tend to correlate strongly with stock market performance.

When the market is on a bull run, advisors are more likely to focus on organic growth and serve their current clients. After all, portfolios are going up, so that means revenue often is going up, too.

When the market goes bearish, though, the script flips. It’s easy for advisors to get overwhelmed or feel frustrated as the increase in service they must deliver wears out even the best advisors. Often, these stressful periods occur when advisors are deciding whether to keep their firm or sell it.

Looking at the behavioral trends over time, I’ve observed M&A activity substantially increases in bear markets. But this dynamic embodies the very definition of “buying high and selling low” and is the opposite way of how to run a firm.

If an advisory firm owner wants to sell their firm, the best time is when the market is high to get the highest valuation on a business with asset-dependent revenues. But how do we know when the market is high? We cannot time it. Or rather, timing it is not a good idea.

Firms who sold their practices later in 2020, for instance, commanded record-breaking valuations compared to those who sold in, say, 2019. Who would have predicted that a pandemic would top off valuations?

The question then becomes, with sky-high valuations, when should advisors sell their firms?

Doubling Down on Service

Herbers & Company has 18 years of data on advisory firm growth, and we’ve seen firsthand how service produces results in both bull and bear markets.

To gain the maximum amount of growth, firms double down on organic growth and improve client service. Oftentimes, in the following years, regardless of how the stock market is doing, we see significant firm growth. These service-focused efforts result in more referrals and clients when the next market change happens.

Our data shows that last year, the firms who focused on organic growth and did not engage in inorganic M&A transactions, grew between 23-25%. While we have yet to see the data from industry benchmarking studies (which generally comes out in the late summer and early fall), our guess is that we are going to see significant organic growth throughout 2020.

What does this mean? If you cannot substantially increase your growth rate by being acquired, don’t sell. Your own service to clients often will experience higher growth and valuations in the future because you have more control over it.

In fact, selling a firm (assuming succession is not the reason) should only be pursued when the acquiring firm can clearly show that it will help your firm surpass its existing average organic growth rate. The problem, though, is that many firm leaders see other firms selling, and they want to follow the trend.

Instead, if today’s firms focused on organic growth and the opportunities for their firms today, they could build on their own growth rates and profitability going forward. When should you sell?

The Right Time to Sell Your Advisory Firm

I’m a believer in selling based on a timeline that fits your firm’s objectives, not on a timeline dictated by what the rest of the market is doing.

The industry plays on advisors’ emotions to convince them of when the best time to sell is. When the markets go down, emotions run hot. Selling out when there is a bear market is not a phenomenon exclusive to investors; it affects advisors, too.

Thus, advisors need to be careful not to sell their firm when they’re feeling emotional about lower revenues due to bear markets or any other growth risk a firm might run into, even in a bull market. Advisory firms go through clear growth cycles, and those cycles, if worked through, can be overcome.

To avoid emotionally based decision making, a firm’s leadership must have clear control over their strategic decisions. A good starting point is deciding what your growth strategy will be and committing to staying the course. Usually that course is to remain focused on improving client service from within.

Unless an advisory firm is trying to carry out a succession plan, the only logical time to sell a firm is when the firm’s leadership decides it can provide better service to clients by joining another entity.

As an advisor owner, the decision to sell your firm is yours to make. If you want to make the best decision about selling, though, be committed to serving your clients in the best possible ways. Many times, this decision means that you stay focused on growing your own firm and don’t sell it.

If you find a firm who serves clients better than you can, you likely should sell it. If not, focus on what you do best. That will command the highest level of rewards, both in service and in terms of valuation, for years to come.

See: The Pros & Cons of Being a Data Driven Advisor


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