Selling your firm, even if you’ve never thought about it

Even if you’ve never thought about selling your financial planning firm or practice before, now’s the time to familiarize yourself with the landscape.

Just look at what’s going on in our industry: Goldman Sachs is buying United Capital. Ric Edelman, the Mutual Fund Store and Financial Engines have all been purchased and rolled into one megafirm. Focus Financial is now a publicly traded company. And almost every day, I read about another small registered investment adviser joining a larger one.

Our industry is consolidating, and fast.

If you’ve been watching from the sidelines and thinking you might want to do something at some point, there are three good reasons to explore your options right now.

First, it’s a seller’s market. Not only are many firms getting large percentages of their asking prices in cash, but investment advisory firms (along with hybrid advisory practices) are receiving highly agreeable terms.

Case in point: It’s been reported that United Capital sold for over 17 times EBITDA (earnings before interest, taxes, depreciation and amortization). Obviously, the typical advisory firm won’t trade for that kind of multiple, but the valuations today are much higher than a few years ago, and it’s certainly not uncommon to see firms trading at two to three times revenue.

Second, there’s a ton of cash out there waiting to be invested in the advisory business. Private equity is now a huge player in the space. That has not only brought in lots of capital, it has resulted in fierce competition for deals. For every purchase you read about in which PE was the buyer, there were five other firms that also wanted the deal. (We ourselves recently entered into an arrangement with capital from private equity.)

And as the Goldman Sachs-United Capital deal demonstrates, large, national firms are making noise in this space. My guess is that in the very near future, you’ll see other national firms enter the fray.

Lastly, the sad fact of the matter is that most investment advisory firms aren’t even growing. (And most don’t know it.) There are numerous reasons for the stagnation, but among them is that it’s difficult to grow an established firm once an adviser reaches capacity.

Other factors are that founders no longer have time to go out and drum up new business, baby boomers are retiring in record numbers (and need their money to live), members of our disproportionately large, wealthy but elderly population are dying and, of course, clients still organically spend down their assets or move their money elsewhere.

The simple fact is that the average adviser who’s reached capacity probably loses 5% to 6% of his or her assets each year but has been blinded to this fact by the long bull market.

Of course, not everyone should sell. But everyone in the advisory space who’s worked hard and run a tight ship should at least dip a toe in the water and see what the marketplace has to offer. Whether you sell, stay put or even swap shares with a growing firm, in my 26 years as a principal, I’ve never seen a sellers’ market quite like this.

(More: Advisory firms’ value is tied to the market’s value)

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with over $4 billion in AUM.