Financial advisors planning to sell their businesses need to ensure there is a culture fit, so the transition is effortless.
Since there are often more buyers than sellers, financial advisors should make sure their due diligence includes examining how the acquiring company conducts business. While sellers can often attract higher prices during these market conditions, advisors “really have to make sure there is a proper culture fit, even if it is not the highest offer price,” says John Anderson, a managing director at SEI, an Oaks, Pennsylvania-based financial services consulting company.
Most acquisitions include a window where the seller is responsible for a smooth transition, he says.
[SUBSCRIBE: Get the weekly U.S. News newsletter for financial advisors. ]
Culture Fits Are Important
Advisors selling their business should ask whether they can see themselves working with the buyer for a year or two, whether the commitment level to clients is the same and whether the other employees will be treated fairly.
“It is important for the success that everyone — the buyer and seller — are a culture fit, especially if the sale is seller-financed,” Anderson says.
Daren Blonski, managing principal of Sonoma Wealth Advisors in California, also says culture fit is an important factor.
“The first thing I look for is whether the advisor is a good fit with how I conduct business and making sure there is an alignment with business practices such as not selling products with high fees such as annuities,” he says.
Another critical factor is double-checking that the advisor selling his or her firm is ready to let go of the reins of the business.
“Many advisors want the revenue from selling their business but are not willing to step back from the operations,” says Blonski, who had a deal fail because the advisor was not ready to retire. “There needs to be open dialogue between the seller and buyer about each party’s respective role.”
Financial advisors need to not only look for a similar approach and investment strategy, but also have open, clear and candid conversations,” he says. “If the clarity is not there, you will run into hurdles.”
[READ: What to Know About Working as a Freelance Financial Planner.]
Other Factors That Can Impact a Deal
Anthony Conte, managing partner at Conte Wealth Advisors in Camp Hill, Pennsylvania and Fort Myers, Florida, which has 21 advisors in nine offices across four states, looks for systemized practices.
“Does the practice still function without you in it?” he says. “Build a process to create a practice that exists without you.”
The advisor’s business processes need to be written down and accessible so that another person can work with the existing process or rebuild them. A good potential acquisition target is a business that is planning for the future.
“I want to buy a practice that has been planning forward for some time,” Conte says. “For the number of practice owners that I have spoken with, too few have spent time documenting the work they have done and what they are doing for the next generation. I want to buy a practice that has sustainability.”
Advisors face four options when they are considering selling their business, says Rob Francais, CEO of Los Angeles-based Aspiriant.
— Transferring ownership to existing partners, junior advisors or family members.
— Selling to a financial or strategic buyer, including private equity.
— Selling to another registered investment advisor, asset manager or financial advisory firm for cash.
— Merging with a like-minded firm and creating a transition strategy based on a stock for stock merger and selling to the next generation.
Before an advisor sells a business, understand what factors are critical to you and your partners — maximizing the price of the business is important, but integrating two businesses is also vital, he says.
“Having clarity around your ultimate exit strategy will help you manage your business more effectively,” Francais says. “Decide if you are ready to give up control since the loss of control is a big roadblock in our industry.”
Waiting too long to sell your financial planning company can be detrimental since the ages of the advisors and their clients are increasing.
“The longer an advisor waits to sell a business, the value of the business may be deteriorating,” he says.
[READ: Starting an RIA From Scratch Can Be Challenging, But Also Rewarding.]
Why Conducting a Valuation Is Important
The first rule for advisors looking to sell their practice is to have a formal valuation done and to agree on that value before proceeding with conversations with buyers, says Alex Chalekian, CEO of Lake Avenue Financial in Pasadena, California.
“After an advisor has had a 20- to 30-year career, it’s true that they are looking to maximize the sale price of their practice as they plan to exit the industry,” he says. “But many buyers are aware of a selling advisor that is either looking to sell for the highest price or create a bidding war. Oftentimes, this is a red flag that the selling advisor is more concerned about the money they will be paid on the sale, instead of focusing on finding the right home for their clients. This can lead to issues during the transition period and should be avoided.”
Many companies are acquiring financial advisory firms because of the current market environment — lower interest rates and tax rates will increase merger and acquisition activity, says Stuart Silverman, president of Bluespring Wealth Partners, an Austin, Texas-based consulting firm for financial advisors.
“There are a lot of acquirers, and it’s almost a perfect storm,” he says. “It has been a trend for many years, and there are an increasing number of acquisitions over the last 10 years because of the aging demographics.”
There were a significant number of deals in 2020, even though deals halted during the second quarter.
“We still saw a banner year in 2020, and the momentum is carrying onto 2021,” Silverman says. “This was a wake-up call for a lot of the older advisors — deals are going faster now, with high multiples for deals, and companies are selling at premium.”
Whether advisors conduct a traditional sale and step away completely from the business or a partial sale to a junior advisor at his or her firm, selling a business is an “exhausting, emotional process,” says Mark Kowalsky, a partner who specializes in the financial services industry at Jaffe Raitt Heuer & Weiss, a Southfield, Michigan law firm.
“My clients are experts in the financial advisory business, and they don’t have the expertise in selling and stepping away from that business,” he says. “There is an emotional element, too. It’s hard to let go.”
More from U.S. News
6 Pros and Cons of Choosing a Fee-Only Financial Advisor
10 Largest Financial Advisor Firms in California in 2020
10 Largest Financial Advisor Firms in New York City in 2020
What to Know About Selling Your Advising Practice in 2021 originally appeared on usnews.com
