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Practice Management > Building Your Business > Dealmaking

Selling in the Red-Hot M&A Market: How to Maximize Your Price

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What You Need to Know

  • The current M&A market has a voracious appetite for independent wealth management firms.
  • Selling on the open market will likely provide a higher sale price relative to other exit strategies, such as retire-in-place.
  • Buyers are focused on the future and looking for the potential growth of your client base, so they want to see a multigenerational team.

For an advisor contemplating retirement, their practice represents the most valuable component of their nest egg. But they can’t tap into that asset unless they own the business outright.

To maximize the value of your career’s-worth investment in your business, you need to be independent. As the owner of your own firm, you can set the path for cashing in on all your hard work once you’re ready to cash out.

When you’re ultimately prepared to sell your independent firm, you’ll find a market with a voracious appetite. There is increasingly strong competition for independent wealth management firms, with year-over-year acquisitions trending upward in every category. Pricing is usually based off of a multiple of Earnings Before Advisor Compensation (EBAC), and sale prices are reaching new highs as transaction volume continues to set records.

According to DeVoe & Co., there were 242 transactions in 2021, a number 52% higher than the 159 transactions in 2020. Last year was the eighth consecutive record year of RIA M&A activity. DeVoe’s analysis points to a projected upward trend of M&A activity that is expected to continue for at least another five years.

Across the board, all types of buyers were more active in 2021, and that includes consolidators, banks, and RIAs.

DeVoe & Co. reports that “the path toward a future liquidity event often yields a willingness to pay higher valuations. The business models of serial acquirers are also often designed to expand margins and increase growth — creating a strong rationale to pay a premium for the right RIA.”

Two Differentiators

Selling on the open market will likely provide a higher sale price relative to other exit strategies, such as retire-in-place. However, we’ve found through our experience in the M&A marketplace, there are major differentiators that determine the price you can attract — and critical steps to take in advance to help maximize the value of your firm.

First, buyers are looking for teams — not sole proprietors. Key man risk dilutes the value of your client book if you’re the only advisor managing your client relationships.

A firm with the depth and breadth of a fully engaged team provides buyers with greater confidence in the potential to retain and grow the business. In anticipation of a sale in the future, advisors currently on their own should look to bring in at least one partner and invest in a team to bolster the value of what an acquirer will eventually be gaining.

When buyers look at a firm’s team, they’re looking at the age, caliber and diversity of the team members. An older team typically reflects an older client base. Buyers are focused on the future and looking for the potential growth of your client base, so they want to see a multigenerational team who not only attracts a younger generation but will also be in place to grow alongside the clients themselves.

Junior team members should be well-trained, carry responsibility, and demonstrate career aspirations that include third-party credentials, such as CFA or CFP designations. It’s important to have a deep bench, but clients need to have confidence in their skills as well.

Diversity Welcomed

Clients also want to see themselves reflected on your team, so diversity is a key area to focus on. For example, if there’s a gender imbalance on your team, consider your next hires from your clients’ point of view.

And never underestimate the day-to-day value of cognitive diversity achieved with employees from differentiated backgrounds.

When considering talent, something that can hurt the pricing of a firm is the existence of a proprietary investment model. If you’ve developed a unique strategy that is highly individualized to your own style of managing your clients’ portfolios, buyers may discount the value of the firm.

You need to understand that an acquisition is attractive when it works as a smooth “plug and play.” The buyer of your firm wants to seamlessly integrate your team and clients into an existing business. Anything that does not fit adds a hurdle.

If your approach to investment management is not replicable without you — key man risk again — then it’s not a value-add for the buyer; it’s no value at all.

Likewise, if you’re running your firm on any type of one-off system, something that was custom-built for you, then the integration into the existing systems at the acquiring firm will be problematic.

Even if you’re using manual systems, the process will not be as streamlined as a buyer would want, and that will affect their appetite for a price that would anticipate a smooth transition.

Financial Planning Wanted

What does lead to a higher appreciation is a book of business that emphasizes client relationships founded on financial planning services. Financial planning is seen as a highly sticky service that is easy to integrate and easy to scale.

Buyers will pay a premium for a firm that delivers a considerable book tied to active planning clients.

Ultimately, buyers are willing to pay a premium for growth, so be ready to show them how your book of business has the potential to deliver more.

You must be able to articulate your active process for marketing to prospects, successfully onboarding new clients, and focusing on organic growth from existing relationships.

Buyers need to learn about your tangible efforts to “bottle the magic.” Otherwise, they won’t be persuaded that there’s more to your book than face value.

However, unveiling the plans that have made you successful and proving the sustainability of those plans will encourage buyers to believe in your book’s potential. And when you have a book of business with a billion plus AUM, and can prove growth, then buyers will be happy to pay a premium, as much as 12x-15x in the current market.

These points show how buyers will value your firm in the open market today. But if your exit plans allow for another five years, then understanding valuation considerations provides you with an opportunity to invest in your firm today with the goal of maximizing the price tag of the future sale of your business.

Jim Dickson is founder and CEO of Sanctuary Wealth.


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