Joe Duran

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Joe Duran

Why Joe Duran hates the word 'roll-up'

The term describes a business model that is detrimental to advisers thinking of selling

Dec 5, 2013 @ 9:05 am

By Joe Duran

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There's a lot of talk about advisers' needing to find a transition plan, and many options are presented to them, including selling to a bank, junior advisers, a peer or the ubiquitous “roll-up.” But roll-ups come in many different forms. In fact, the term itself is a pejorative and used to describe somebody who simply acquires individual firms for a portion of their cash flow. They often have no regard for the underlying operations of a business' quality or plans for fundamentally improving the company.

There are two things everyone thinking of joining a “roll-up” should ask:

HOW'S THE PIE SLICED?

The first question any seller should ask is how the investor or buyer is going to make money. The math is really simple. If the underlying investor is paying you a price and expecting to make money, and they bring nothing to the table, the only way they can make money is to take a bigger slice — and you can guess where that slice is coming from! Almost all roll-up firms are simply in the business of financial engineering.

There is a different approach, however, since some investors are going to make their money by expanding the pie. What does that mean? It means that they know going in how they are going to be contributing to your business and can describe to you how you are going to have to change in order to make the business more valuable. If you want to sell and change nothing, a roll-up is a great answer, but know you will pay a price, as that is how they make their money. If you want a better potential outcome it will come at the cost of having to change the way you work, at least in some way.

HOW MUCH IS YOUR MONEY COSTING YOU?

The truth is, most sellers never really ask where the money is coming from, but if it comes from private-equity land, it's probably incredibly expensive money. In other words, it could be 20%-plus expectations. And if that's the case, the growth hurdles that are going to be expected from the underlying firm are very high.

Very often, debt instruments that are part of the equity investment are senior in priority, which means that the equity investors could be left with only a shell and no real underlying equity. So whenever you are dealing with an investor, it is important to take two major factors into consideration: where the money is coming from and the underlying investors' expectations and rights. You can bet no “roll-up” firm will want to share that information with you!

Obviously, I have a personal self-interest in highlighting areas where I think people can be harmed. For me, it is frustrating when smart financial planners, who built their business on financial acumen, don't ask the two most important questions that will help determine if they are going to be employees or partners with other people. This is no different than asking your fiancée what his/her expectations are and how much debt he/she will bring into the marriage. You would never counsel your clients to not ask those questions and I would not counsel you to not ask them.

Since our firm believes fundamentally in expanding the pie and we have been hawks about not taking any costly institutional debt or mezzanine financing, it frustrates me to no end when we get compared to those other kinds of firms. They, I am sure, will be successful in their own way; it's just not our way.

Joe Duran is chief executive of United Capital Financial Advisers. Follow him @DuranMoney

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