Selling your advisory firm internally could mean taking a valuation hit

Echelon executive also argues that outsourcing investment management makes a firm more attractive to acquirers

Jun 7, 2018 @ 3:33 pm

By Jeff Benjamin

Advisory firm owners who are considering selling their firm internally in a succession-plan transaction rather than to outside buyers might be taking a valuation hit, according to Daniel Seivert, chief executive of investment bank Echelon Partners.

"Internal deals are more difficult than people think, and because there's no competitive process, valuation discounts are the norm," he said Thursday morning during a panel discussion at Pershing Advisor Solutions' annual Insite conference in Orlando, Fla.

Mr. Seivert, who participated in a point-counterpoint debate on advisory firm merger and acquisition strategies along with Pershing Advisor Solutions CEO Mark Tibergien, said 60% of deals now involve internal buyers.

That percentage is up from 40% 10 years ago, Mr. Seivert said.

While Mr. Tibergien pointed out that an internal sale can be "the first step in creating continuity in an enterprise, and optimizes value," Mr. Seivert said external deals "lead to valuation premiums."

"There is no synergy value in an internal sale because no new element is being brought in to the business," Mr. Seivert said. "Also the process of an internal deal can tear at the fabric of your practice."

Another hurdle for internal deals, Mr. Seivert said, is that "buyers often have no experience with the financing and legal elements, and that part can be difficult, especially for younger buyers."

The panel discussion, moderated by Megan Carpenter, chief executive and co-founder of financial services communications firm FiComm Partners, was less about taking sides then it was about provoking thought among the audience of about 100 financial advisers.

For example, on the topic of outsourcing investment management, Mr. Tibergien challenged the audience on why most of them charge fees based on assets, yet consider themselves holistic financial planners.

"This is the only profession I know of where the fee is based on the value the client brings to the business," he said. "If something is the core of your value proposition, you should own it. But if it's a satellite value, you should rent it."

Mr. Seivert elaborated on the value of outsourcing investment management if the goal is to be the target of an acquiring firm.

"It makes you more M&A-ready if you don't have an investment team because buyers often don't want it or don't want to pay for it," he said. "Also, if you're the asset manager and something goes wrong with the portfolio, you're responsible and that can get your fired."

Mr. Seivert further drove the point home by pointing out that "proprietary investment management is time-consuming and it can take your focus off the business."

"That's why firms with proprietary investment management are seen as higher risk and are valued at a discount," he added.

(More: Focus Financial IPO could be a sell signal for RIAs)


What do you think?

View comments

Recommended for you

Featured video


Financial advisers highlight solutions to increase diversity and inclusion

These Excellence in Diversity & Inclusion award winners suggest short-term changes to help foster D&I in the financial advice profession.

Latest news & opinion

Ex-Wells Fargo brokers sue for damages, claiming they lost business in wake of scandals

In a Finra arbitration complaint, two brokers allege that Wells Fargo's problems damaged their business.

Dawn Bennett found guilty of $20 million Ponzi scheme

Jury took less than five hours to convict the former financial adviser and radio host.

10 advisory firm employee benefits you won't believe

Some advisory firms stand out for their creative efforts to keep their troops happy and engaged. Spa retreat, anyone?

401(k) record keepers seek new revenue streams to 'save themselves'

Service providers are getting pinched by fee compression.

Small-cap funds take a beating

For most of the year, the sector had outperformed, but that all changed last week.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print