Time is right for a big pay day

It's a good time to sell a financial advisory business, especially if the owners have spent the past decade planning their exit.

It’s a good time to sell a financial advisory business, especially if the owners have spent the past decade planning their exit.

Market figures suggest that there is growing investment interest from private-equity firms and consolidators, as well as an increase in the size of the firms being purchased.

Valuations of deals haven’t reached the highs set in early 2008, but they are greater than the low period in 2009, according to figures from Schwab Advisor Services.

And the bigger the firm, the better. A registered investment adviser with $100 million in assets under management can sell for about four to six times cash flow, while a $500 million firm can attract a deal for five to eight times cash flow, Schwab estimates.

Strong activity, though, shouldn’t fool advisers into thinking they don’t have to work hard to pull off the big payday.

“People are becoming more prudent about the acquisitions,” said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC. “The opportunities are pretty great if you are of the mindset to prepare for a transition of ownership, management responsibilities and client responsibilities.”

A strategic buyer, or consolidator, such as Focus Financial Partners LLC, which purchased two registered investment advisers with more than $6 billion in assets during the third quarter of this year, will pay the most for an advisory business, Mr. Tibergien said.

A large advisory firm looking to grow in a particular geographic market is another type of purchaser likely willing to offer a premium for an adviser, as well as banks and accounting firms that seek to create a bigger footprint, he said.

A SELLER’S MARKET

“There’s no shortage of buyers looking to grow through acquisition,” said David Grau Sr., president of FP Transitions, an investment bank that helps advisers sell their firms. “The deals getting done are more strategic, with buyers looking for a geographic fit and complementary skills.”

Felipe Luna agrees it’s a seller’s market. For the past five years, the president of Concert Wealth Management Inc. has considered buying more than a dozen advisory firms and still hasn’t completed a single purchase. In some cases, the departing owners have struggled with trying to walk away from their life’s work and have held up the deal, he said.

In other instances, the firms haven’t been up to snuff. Mr. Luna looks intently at how a firm runs and serves its book of business. He’s looking for firms that offer consistent service across their client base. As a buyer, “we’re going to have to replicate that offering,” Mr. Luna said.

When an owner contemplates an internal sale that would turn the business over to others within or associated with the firm, valuing the business is an important first step, Mr. Grau said.

Ideally, a firm wants to begin thinking about succession a decade before the transition needs to occur, because of the many things that need to be done, Mr. Tibergien said.

In addition to needing about eight to 10 years to develop a partner to become an owner, the firm must make sure it has a growth engine that will provide sustained revenue and continuing profits.

“The value is a function of the future, not the past,” Mr. Tibergien said.

With an external sale, advisers should consider getting professional help when they’re ready to look for a buyer, he said. Common mistakes include pairing up with a buyer that isn’t a cultural fit for the firm’s employees or its clients.

“Chances are, this is the first time the owner is in this position, and in most cases, they are negotiating with people who have done multiple deals,” Mr. Tibergien said.

Experts in helping advisers create and fulfill succession plans agree that the more time put into the succession-planning process, the better the outcome for the adviser and clients.

However, the truth is that most financial advisers don’t have a full- scale succession plan in place.

Susan Fulton, founder of FBB Capital Partners LLC, followed the advice of experts and began preparing her firm a decade ago for a future without her.

Ms. Fulton, 71, doesn’t plan to retire. She has a buy-sell agreement in place with a partial owner of FBB Capital that will kick in at her death. Life insurance policies also have been set up so the firm can buy out a portion of her 76% ownership stake.

While confident that she’s prepared, she is sympathetic to those who drag their feet on succession planning.

“It’s like an admission you’re going to die,” she said.

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