The 7 Pillars of a Successful Advisory Firm Sale

Author of a new book, “The Exit Equation: M&A Strategies, Tools and Insights for Financial Advisors,” Bready specializes in consulting to advisors preparing to sell their firms.

She sold B-Ready Outsourcing to Envestnet in 2010, staying on for the next six years. At the time of sale, she had 120 clients and was reporting on $38 billion in AUM.

Asking pointed questions of buyers is helpful, Bready says. For example, “Have any of your past acquisitions failed — and why?”

Snapping up the newest technology mainly to impress potential buyers isn’t a good idea, she maintains, and disclosures on the seller’s record are “not a deal breaker.”

In the interview, Bready reveals the three things that advisors must do to properly prepare for a successful sale of their business.

Here are highlights of our conversation:

THINKADVISOR: What are the seven necessary pillars to fully prepare a firm to be successfully acquired? 

LINDA BREADY: One is to define your exit goals. Leadership has to understand what they want and why they’re exiting.

Do they want to completely leave, or do they want to stay but have additional shoulders to help share the burden of running the business?

Are they taking a minority investment to get more working capital?

What are their plans for after selling?

THINKADVISOR: What’s another strong pillar?

BREADY: Getting your financials in order: the documents you need to make sure you can prove what your revenues are, cash flow [and so on].

Some small firms [record] expenses in the wrong places, like your vacation out West last year — that wasn’t a business expense.

THINKADVISOR: What’s a third pillar?

BREADY: Strengthening your leadership team and team stability. Buyers want to see depth beyond the founder. That’s really important.

Make sure you’re including your next-generation leadership as part of the benefits of your firm.

Be sure the leadership is aligned in understanding what you’re trying to do by selling. That’s critical.

THINKADVISOR: And the fourth is …

BREADY: Optimize operations and scalability. You need to have documentation for your processes and operations. Processes increase buyer confidence. Operational inefficiencies can lower value.

Tribal knowledge is a real problem. For example, if you’ve got one person who always does the account openings and has been doing that for the last 10 years and never taught anyone else how to do it.

THINKADVISOR: What’s another pillar for getting prepared?

BREADY: Assessing your client base regarding retention risks. You need to have a really good understanding of the types of clients you have. If you’re merging with a larger firm, are your clients at risk? Would any of them leave because they want to work only with you?

Also, if your entire client base is already 55 or 60 years old, acquirers will think that they’ll start withdrawing their assets as they retire [soon]. So what’s the growth plan?

Buyers want to see a system behind your growth. Most aren’t just buying assets. They want to know that the client relationships are stable and that your team is going to be able to work without your being there.

The best and easiest firms to sell are those where the head of the firm or the leadership can take time off, but the firm keeps running well.

THINKADVISOR: What’s the sixth pillar?

BREADY: Maximize your technology and data systems. Not doing so can make or break a deal.

Don’t go buying new, shiny technology just for the sake of having the newest thing. Make sure you’re using what you have to its fullest capacity.

One reason is that the buyer may want to change out all your tech anyway.

But the better your team is at utilizing your technology to its fullest extent shows a broad range of adaptability.

THINKADVISOR: And what about the seventh pillar?

BREADY: Reduce business risk and compliance issues. You have to have a thorough understanding of everything that needs to be in order legally.

Make sure to cross all your T’s and dot your I’s. Be certain that all your contracts are up to date and documented. Some may have termination clauses that will create an issue for the acquiring firm.

If you have disclosures on your record, that’s not a dealbreaker, but talk about it upfront. Don’t let [potential buyers] find it in the due diligence because then it looks like you’re trying to diminish it.

THINKADVISOR: What do you consider the top three things a financial advisor must do to properly prepare to sell their business?

BREADY: The first is to get your numbers in order. You might need a CFO or a consultant to help do that.

When you sit down at a table with someone interested in buying your firm, and the investment banker is present, every time the buyer asks a question about your numbers, you need to be able to answer those on your own, not the investment banker.

THINKADVISOR: And the second?

BREADY: Making sure you have business continuity and that your operations are in order. You need to have documentation of the processes and the abilities of the firm, not tribal knowledge.

Tribal knowledge is fundamentally not good, and it’s really not good if you’re trying to sell your firm.

THINKADVISOR: No. 3?

BREADY: Having a good grasp of what you’ll do after the sale. Once you’re no longer [running your business] full time, what do you want to do? Play golf? Read a book on the beach? Keep working but in a more limited fashion?

All of that has a bearing on how you choose your buyer. If you completely walk away, you have to find a buyer that’s ready to give you an earn-out time. Are you going to stay for a year, for two?

THINKADVISOR: What are red flags to a potential buyer?

BREADY: When your revenues look strong but your margins swing wildly from year to year. Or if there’s no succession plan or performance metrics.

Also, when you are a one- or two-person shop, and your bookkeeping is commingled with your personal stuff, that’s a red flag.

Buyers and money people want that taken apart so you’re not overestimating what the costs of the business are.

THINKADVISOR: There’s lots to get right. Isn’t there?

BREADY: Most buyers don’t expect everything to be perfect. But if buyers find one contract that hasn’t been updated, say, they’ll assume there are more. So you want to make sure they’re in order.

You’ve got to be prepared. And it’s not that hard.