Recognizing When It’s Time To Sell, Part 2

If it ain’t broke, don’t fix it.

I often hear financial advisors say this. These days, it makes sense.  Take a lengthy and robust bull market, mix in a new client every now and then, and business cash flow is as healthy as that kale salad you had yesterday.  “If it ain’t broke, why fix it!” says the advisor as she takes another Friday off to play a round of golf with her friends.

In my last article, I described a 65-year old financial advisor who is considering the sale of his wealth management business. Facing health issues, increasing client attrition, and a younger staff who desires a technology and branding refresh, the advisor realizes that selling his business should be strongly considered.  It makes sense, considering RIA business valuations have never been higher, and there is a plethora of well-capitalized buyers who’d love a conversation with the owner.

In Part 2 of this series, we examine a younger, 52-year old RIA owner.  She’s the one playing that aforementioned round of golf.  She deserves that day off.  She’s worked very hard over the last 15 years to build a firm with $450 million in assets under management, and a staff of nine bright professionals.  With just under $4 million in annual revenues and 30% profit margins, the business appears healthy, and clients and staff seem happy.

Upon conducting a basic business review, however, she’s had to acknowledge a hard truth: the practice’s rate of client and new asset growth has fallen off a cliff in the last three years.  Stock market appreciation has masked this growth stagnation.  Meanwhile, her local competition is growing much faster and leaving her firm in the dust.  

The firm’s traditional referral sources are no longer sending her prospects. The firm has done no marketing.  Without a steady flow of growth, she knows her revenues and profits can be compromised by the inevitable market downturn and/or a spike in client attrition.  

After receiving candid feedback from her staff and client advisory board, she’s determined there are three main issues:

  • The firm hasn’t kept up with advances in technology, negatively effecting firm efficiency and the level and quality of client communications 
  • There’s been no money or time spent on marketing. Her competition has done far more to market their firms, utilize social media, and build brand recognition
  • The owner has focused her time and energy on the management of client assets, and has neglected the nurturing of the firm’s referral sources 

Bottom line, our owner hasn’t invested in her business and has mismanaged her time; all of which has stunted new client growth.  Those healthy profit margins, she now realizes, were actually too high. She neglected to make important investments in technology, marketing, and most importantly, talent.

Our young advisor can choose to remedy these issues by investing in these areas of the firm or take the more aggressive step of exchanging a portion of her business ownership for the resources she needs to grow her firm.  

She decides to sell a piece of the business.  Why this route?  Because she doesn’t feel she has the time, collective knowledge, nor inclination to climb this mountain.  Moreover, she knows there are plenty of firms who would be interested in partnering with her.

SALE OBJECTIVE: Sell a minority stake of the business, structured so that our advisor maintains control while also incorporating a new partner who can bring capital and expertise to drive significant business growth.

As I stated in Part 1 of this series, selling a piece or all of one’s business is a very personal decision.  There are four things she needs to do to prepare her business for a sale:

  • Get financials in order and understand the value of her business, specifically the health of her profit margins
  • Determine the key areas of the business that need to be improved (e.g. technology investment, marketing, talent)
  • Determine what role she wants to play in this partnership, and what responsibilities she is willing to forgo
  • Think about what type of buyer (firm and management team) would be a good fit, and most importantly, what kind of firm would NOT be a good fit

You’re Not on an Island

According to Discovery Database, there are 4,000+ independent RIA firms with assets under management between $400 million and $2 billion. Many of these firms are owned by professionals who are not only in the same general age range as our advisor above, but also have businesses that are facing similar growth challenges.  Selling a portion of “one’s baby” is a tough decision, but it can be the right decision if a like-minded buyer can support the achievement of one’s professional and personal goals.

How do you find that buyer?

  • 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

Most importantly, take your time and place emphasis on the people with whom you will partner.  Take a hard look at the integrity of the buyer and their people, and their track record of integration success.  Speak to the executives of past deals.  Whatever you do, resist the temptation to be swayed by the sizes of the checks that are being offered.  They will be large. But no amount of money can overcome the deep challenges of partnering with the wrong firm and people.

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

Good luck, and stay focused on happiness.

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