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?