Does sell and stay really work?

There have been hundreds of RIAs who have sold to larger firms in the past few years. Sometimes the transactions occur because the founder wants to retire and move on. But oftentimes, the founders sell for other reasons and decide to stay on.

How successful are these advisors who sell and stay? Does it work well for the founders? The clients? The employees? And what about the acquiring firm.

Having been involved in dozens of transactions, I’ve seen what it takes for a transaction to be a smashing success and I’ve seen where things go off the rails, leaving both the seller and acquirer with regrets.

Many recent transactions have taken place for three main reasons: One, an aging founder realizes that if she doesn’t take succession planning into her own hands, one day someone else may do that for her, due to either an illness or death. Better to find a buyer of her choosing while she’s in control. Two, she finds herself spending too much time running the business and not enough focusing on her first love – serving clients. Three, valuations for firms are at such a premium that the numbers are just too good to pass up.

When a founder sells for these reasons, they typically have no desire to retire. On the contrary, they are still relatively young and desire to continue working for a few more chapters.

Sometimes these next chapters are the most rewarding years of their careers, while other times it’s nothing but a series of endless frustrations.

Here’s what I’ve discovered are some the secrets for a rewarding “sell and stay” experience.

Mindset: This is by far the most important factor to having a successful transition. You move from a position where you make all the decisions and call all the shots to one where you need to work well on a team and conform to a new set of processes and procedures. As one person said to me, “I used to be the man; now I’m working for the man.”

Having the right frame of mind both leading into and post a transaction is crucial. It’s really all about expectations. If you believe nothing is going to be any different after you sell your company, you are highly mistaken. Life will be different. You’ll ultimately report up to someone else. Granted, we all serve someone professionally, whether it’s clients, employees or partners. Once you sell your firm, you report to your new owners. They have their own set of expectations.

If you can focus on the benefits of the transaction, whether that’s more time to serve the clients you love, added services to offer your clients, greater influence within the marketplace, personal financial freedom, etc., you can have a wildly successful future. But if all your focus is on what you’ve lost, you’ll likely be miserable.

Clarity of role: Having a clear understanding of your role within the new organization will be highly valuable to your success. Perhaps you want to focus on being the best financial advisor to as many clients as possible. In this case, you’ll want to leverage the services of the new firm and realize your position is no longer making decisions on the items related to running a business.

You may take a leadership role in the new organization. One of the benefits of the serial acquirers in our industry is that they can obtain fantastic talent. The leadership within these organizations is typically built upon the leaders of firms that joined them.

If you don’t have a good understanding of what your role is, you’ll likely be frustrated. You may not have this clarity leading up to a transaction, but it’s important that your role is defined within the first year.

Alignment of interests: Clients and advisors generally prefer a fee-based arrangement when it comes to their financial management because it aligns the interests of clients and advisors. Having similar alignment between buyer and seller is equally important.

Alignment post-transaction can be accomplished in a couple of ways: One is compensation. If your compensation rewards you for doing those activities that lead to the company’s success, you’ll be helping the company prosper. But if your compensation is not aligned correctly, or not enough to motivate you, you may find yourself frustrated as you may have trouble seeing where you add value.

Another important factor is that of equity in the acquiring firm. Receiving some equity as a portion of the purchase price enables you to maintain some skin in the game. If your equity piece is large enough, you’ll be motivated in the success of the firm.

Those advisors who come to a transaction with the right frame of mind, possess clarity about their future and have an agreement that aligns everyone’s interests can thrive and have a very rewarding career. When these elements are lacking, that’s when a sale becomes a failure for all those involved.

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with about $25 billion in AUM.