The decline of internal succession in the age of integrators and aggregators

A decade ago, internal succession was the norm.

Sure, even back then advisory firm M&A happened, but compared to today, the valuations were proportionately much lower. In 2012, with a lot of planning and a little creative financing, a principal could reasonably expect to complete an equitable ownership transition with an existing partner or younger adviser.

Today, with competition driving sales multiples upwards of 10X, skyrocketing prices have made internal succession increasingly rare.

The fact is that even if all interested parties are motivated to keep the transition in-house, and even if substantial outside financing is attainable, the principal still must carry a lot of risk. That not only makes internal succession plans complex and legally cumbersome, it means they must be implemented over far too many years to make them worthwhile for most seasoned principals.  

Which brings me to modern M&A, and specifically, succession via outside partnership.

Whenever I meet with a potential partner, one of the first questions I’m asked is: What are the differences between integrators and aggregators?    

There are certainly several similarities. For instance, both integrators and aggregators can be totally or partially backed by private equity. They both offer some deal flexibility. And because private equity-backed integrators and aggregators have combined to increase the number of potential buyers overall, neither the bear market nor rising interest rates have dampened the now years-long sellers’ market for advisory firm principals. 

With aggregators, while the types and structures of the deal can greatly vary, they tend to be similar-to franchisers, with centralized, hands-off ownership under which the acquired firm continues to operate quasi-independently.

Aggregators don’t typically offer equity, meaning the sale will usually consist entirely of cash. Additionally, there tends to be no technological support from the acquiring firm, there probably won’t be any career advancement opportunities for employees, and the client experience and quality of advice can vary from office to office.

Lastly, aggregators can evolve into an integrator model, but the reverse is never true.

Probably the single biggest advantage of the integrator model is flexibility. A combination of cash and equity in the acquiring firm brings forth a shared interest in the growth of the parent company. Most principals who sell to an integrator cite their primary motivations as, first, wanting to take some financial risk off the table, second, wanting to continue to work, but with less day-to-day responsibility (though retirement is also a possibility), and third, providing more professional growth opportunities for their employees.

Thirty-seven percent of principals say they plan to retire in the next decade. “Forced retirements” due to ill health will probably drive the number closer to 50%.

When it comes to succession, while there are a lot of choices, multiples remain high. And as a principal, always remember that almost any carefully developed plan is going to be better for your family, employees and clients than to have no plan in place at all.

Pat McClain is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.