- Key insight: From clear documentation to team composition to business structure, RIA owners considering the sale of their business have a wide range of pre-sale issues to address.
- What's at stake: To land the best deal possible, advisors planning to retire and sell their practice often need a much longer runway than expected to prepare.
- Expert quote: "Can you do this all in six months? Sure. Are you going to have to make compromises? Most certainly." — David Grau, CEO of Succession Resource Group
"Time moves slowly, but passes quickly." That famous line from Alice Walker's novel "The Color Purple" applies to many aspects of life and business — and, thanks to recent deal trends, it now carries particular resonance in wealth management M&A.
For the owners of registered investment advisory firms and other advisory practices who are planning to sell their firms, it has been "relatively easy historically to get a good value" in a transaction, said David Grau, the CEO of consulting firm Succession Resource Group.
"I don't think that will be the case going forward, and I think, in another five to 10 years, there will definitely be some practices that, because they were not prepared for sale, they will have a tough time selling or getting a good value," he said. "They'll have a tough time getting a buyer."
In a webinar Grau led last month on the steps sellers should take to secure a deal
"Depending on what your three- to five-year window looks like, you could very quickly run out of runway if we don't start the process early enough," he said. "Can you do this all in six months? Sure. Are you going to have to make compromises? Most certainly. … Longer is better, shorter we can make work — but you just just don't get as much optionality."
Preparing an RIA for a deal at the most favorable value
As buyers more closely scrutinize potential deal partners' business to ensure their numbers reflect the ongoing revenue over multiple years rather than a recent development that may not hold up over time, Grau provided a lengthy to-do list of items requiring resolution in advance of any deal, if financial advisors aim to secure the highest valuation.
The list included:
- contractual agreements like office leases, forgivable loans and commitments to broker-dealers or custodians;
- several years of clearly documented profit and expense data;
- multigenerational, transferrable client relationships with solid recurring revenue;
- a team with second- or even third-generation advisors to reduce key-person risk;
- a possible change in business-entity structure;
- and, of course, pursuing the deal itself.
The transaction itself can take many months, Grau said, starting with gathering the firm's data and bringing it to market, followed by negotiations — then there's everything that comes after accepting an offer.
"You accept an offer, you do due diligence, we work on the contracts, we get the financing lined up," he said. "That can legitimately take four to six months, and then you have the transition process, which can take six to 12, maybe 18 months."
Even in a time when Succession Resource's tracking figures suggest sellers are netting record deal multiples, former owners often tell Grau's team they wish they had given themselves more time to figure out their destination. They also say that they wish they had taken more time to calculate, compare and manage their valuation annually; prepare the firm for buyers' due diligence procedures; create a competition among the suitors rather than accepting the first offer; and confirm that they will end up "unencumbered" in the right home after the deal, according to his presentation.
All too often, that last goal winds up a lower priority during the pivotal decision-making time.
"It's price, terms and fit, and I hope it's the reverse, right? That it's 'fit' first and then 'price' or 'terms,' depending on your risk tolerance and your preferences," Grau said. "The good news is 'fit' is still in the top three, but I promise, if you put 'fit' first, everything else gets a lot easier."
The realities of the available potential buyers for most RIAs
Pre-deal strategy and post-deal fit may sometimes get lost in industry conversations, which typically focus on eye-popping valuations or on the classification and capital source of the acquiring firm. But the prospective seller's size, timeline target, market of potential buyers and long-term goals will affect how long they have to reach the finish line.
The selling firm's enterprise value will dictate the market of suitors, Grau pointed out. Advisory practices valued at under $2 million will find potential purchasers among third-party peers or internal successors; those between $2 million and $10 million could add private equity-backed aggregators to the mix, and those at more than $10 million may consider a direct PE investment, he said.
Those PE firms "want large enterprises that are no longer owner-operated," and they're not likely to offer the most competitive deal structures to smaller advisory practices, Grau said. "Most of you listening, statistically, have either, A, no interest in selling to a private equity buyer, which is kind of your quintessential selling out, right, literally and figuratively? But on top of that, most advisors will never really get big enough or want to get big enough to court serious offers from private equity. Will they make offers? Yes. Are they good offers if you're below a couple billion in AUM? Not really. You can do better."
But to get good offers, advisors nearing retirement — more than 100,000 are expected to retire in coming years — must start preparing as quickly as possible.
"There are a lot of advisors that are going to be retiring in the next decade," Grau said. "They do not have an exit strategy, and I promise you, too many of them will wait too long."
