Recognizing When it's Time to Sell

One would have thought that M&A activity and rep movement would have slowed in 2020 and into 2021, but that was anything but the case. Studies by Echelon and Discovery Data tell us the activity continues to accelerate. 

My own podcast with Liz Nesvold, Managing Director and Head of Asset & Wealth Management Investment Banking at Raymond James, was spot on as we discussed how and why M&A accelerated in 2020 after an initial slowdown.

What surprised many people is how effectively meetings over Zoom served to bridge the communication gap when in-person conversations were no longer possible.  However, now that we are emerging from the pandemic and before you close a deal, one needs to visit the potential partner firm to talk to employees, principals and get a good sense for the culture. That’s a piece of the process that is just not quite the same virtually. Like everyone else, I am greatly looking forward to freely moving around our nation again very soon.

With all this activity, one has to wonder what brings someone to the point of a move or a sale. And on the flip side, is their firm prepared and attractive for acquisition?

Selling your business or allowing an outside firm to take a minority interest is a very personal decision for you, for your employees, and - most of all - for the relationships you have with your clients.

I want to use my next two articles to provide two case studies that encapsulate the two types of advisors we at Kingswood U.S. are seeing consider either full or partial buy outs of their practice to support their goals.

CASE STUDY ONE: Advisor Approaching Retirement

In our first cast study, we are working with a 65-year-old advisor in Denver. His firm manages $750 million and employs five people. The business has experienced a growth in assets predominantly from the overall market performance over the last few years rather than from adding new clients. In fact, the firm is starting to experience attrition as clients pass away or otherwise turn over management of their money to their children (who take it elsewhere). Younger employees are pushing for updates to the technology stack and marketing efforts that involve digital content and social media, all of which seem overwhelming and expensive.

The owner has begun to experience health issues and has decided that he wants to cash out and retire in the next three-to-five years. Unfortunately, there is no obvious successor inside the business.

Our business owner is also aware of the current M&A activity in the RIA market.  Given his understanding of business valuations and also his feelings about likely increases in capital gains taxes, it appears to be a good time to sell.

SALE OBJECTIVE: Total buy out of his business, structured so that he stays around to sunset his clients in the next 3-5 years

Key trigger points in his decision:

  • Age and health
  • Recognition that the firm needs to adapt to grow, and that he himself does not have the energy nor the inclination to evolve his business again
  • The seller’s market and likely tax changes

Three things he needs to do to prepare his business for a sale:

  • Get his financials in order and understand the value of his business, specifically the health of his profit margins and the solvency of his business
  • Determine his key objectives in the sale of his business (e.g. take care of his clients, take care of his staff, preserve his investment philosophy, etc.)
  • Think about what type of buyer (firm and management team) would be a good fit, and importantly, what kind of firm would NOT be a good fit

With the continued greying of financial advisors in our industry, this type of scenario is more and more common. I think there are two decision points here. One, is to sell and get out in the next two to three years.  If you’ve built a successful business, you’re going to have the financial security to have an enjoyable retirement.  If you choose the other route and decide not to sell, you need ot be on the hunt for a successor that can come into your firm. At the end of that on-boarding process you may be able to dial back your hours over time and enjoy life in a different manner.

Getting Your Plan in Place to Move On

Given the often-discussed demographics of this industry, there’s bound to be many advisors who can identify with what I’ve discussed in this article.  If you’re ready to sell, or are strongly considering it, you need to prepare yourself in two ways. It’s time to get your business ready — with every number accounted for.  And get your mind right.

As far as getting your business ready there are three steps to take:

  • Seek help from a qualified valuation firm to determine the fair value range of your business
  • Reach out to an investment banker to represent your business
  • Directly reach out to a known buyer (like Kingswood U.S.)

Having the Successful Mindset

Getting your mind in the right place is just as important. Someone once said to me, “The day you sell your business is the day you are no longer the boss.” This couldn’t be more true. Once you sign those papers you don’t get to call the shots any longer. This is something, as being the founder and/or leader of the firm, you need to get your head around and truly accept. 

Also, be mindful that when you sell your business, you need to hold true to the decision you just made and, as they say in baseball, play out the ball.  A smart buyer will structure an earn-out, typically tied to asset and/or revenue retention, to keep advisors engaged.  That said, you should take the long view about doing the right thing for your clients and for your staff while adhering to your commitments to the buyer.  Far too many advisors have taken the cash and checked out mentally. 

If you need help talking through where you are and where you want to be, feel free to reach out to me.

Next week, I am going to delve into my second case study - an advisor who wants to take his/her firm to the next level, but can’t do it alone.

Related: Taking a Cue from The Queen’s Gambit - A Business Plan with the “End Game” in Focus

Related: Can You Hold My Attention? Elizabeth Nesvold