What is it like to be wanted? To have your business model coveted by many eager buyers?
Aspirational buyers and well-funded buyers alike are popping to the surface, looking for opportunities. Some experts believe that supply and demand dynamics will elevate purchase prices by great multiples — an exciting yet challenging notion for potential sellers.
The sale of their business may be the one and only deal agency owners make in their lifetime. Most owners lack experience in navigating such transactions, along with the accompanying scar tissue that would make them more cautious. Meanwhile many buyers, particularly the consolidators, are adding to their know-how with each purchase. In negotiations, the advantage goes to experience.
Current owners should remember that they do have leverage, however. If they own a solid business with a strong team of people and a loyal client base, they do not have to sell for economic reasons. Most firms these days are generating positive cash flow, increasing compensation to owners and employees, and enjoying a demand for their services.
Like most entrepreneurs, successful advisors still fear that one day their ride will end, either voluntarily or involuntarily. These nagging doubts complicate a transaction for many reasons:
Emotional attachment: Perhaps the hardest thing for entrepreneurs to surrender is the feeling of control. Small business owners know that “control” is an illusion, but being in charge of your own decisions and defining the pace at which you work, the people with whom you work and the clients you want to serve is quite liberating. This freedom can change once you introduce a partner — let alone a majority owner — into your business.
Financial benefit: Simply speaking, the value of a business is the present value of future income. Advisors typically believe that income will rise at a greater rate than what buyers estimate. Sellers also believe a higher price should be paid than what the terms and conditions in the purchase agreement ultimately allow. In addition, sellers may agonize over the possibility that the value of the company will skyrocket in the next few years, which would mean leaving millions on the table if they sell too early.
Employee impact: Many advisory firm owners do not think that their employees could pay fair market value for the practice, yet they still recognize the need to take care of those who have helped the firm grow. Owners worry that loyal employees will not be treated with the same respect, compassion and opportunity once management changes.
Client service: Most buyers want advisors to continue working for a period of time to ensure that the client base transfers. Yet the sale of a practice represents a point of finality, indicating that advisor-client relationships will not continue forever. Dedicated financial professionals experience great angst as to how their loyal clients will be treated under new management.
Client loyalty: On the flip side, the prospect of a sale also can create painful uncertainty over whether clients will stay with the firm once management changes hands. Firm owners know that the loss of key clients will diminish the practice’s value for the buyer and compromise the terms of the deal.
The list of anxiety-inducing concerns goes on. Fortunately, prospective sellers can begin to mitigate these risks before they enter any conversation to sell. Next, I’ll offer some basic considerations for every advisory firm owner, whether you are 10 months or 10 years from a big liquidity event.
Issues to resolve
- Is the goal to cash out of the business, to seek liquidity?
- Is it to merge with another firm to create a greater market presence or to tap into capabilities you do not have?
- Is it to ensure that clients (and employees) are taken care of should something happen to you?
None of these choices precludes maximizing the practice’s value, but motivation and vision do inform the steps required to make the advisory firm appealing to prospective buyers.
How important is cultural alignment in the transition?
When selling to a financial buyer, the “warm and fuzzy” components fall by the wayside; the decision to buy is based on price, terms and expected ROI. Financial buyers primarily seek to harvest income from the assets in which they’ve invested and later to roll over this investment to another financial buyer seeking the same dynamic.
Sellers who wish to ensure consistency in how clients and employees are treated must ask the right questions to gain confidence in the buyer.
For example, what is the leadership style of the new owner? How are decisions made? What is the career path for employees? What is the economic model for the firm? How will clients be advised and serviced going forward?
Perhaps the most fundamental element of a deal is an understanding of the earnings power of the agency and the probability that it will continue. For example, a buyer who looks at the client base and finds that future income relies on an aging demographic may discount the firm’s value.
Fortunately, many buyers still rely on rules-of-thumb based on past gross revenue, rather than critical analysis of the practice economics and future prospects.
With these transactions, sellers should beware of terms in which the final price heavily depends on an earn-out over time. The client attrition rate or de-accumulation of assets may drive the net payment down, or the buyer may realize he can’t afford to pay for what looks like a depleted oil well.
Psychology of transition
Lastly, owners of advisory firms should seek professional counseling to help with this difficult decision. The psychology of transition is complex and emotional. Oftentimes one’s identity is tied to being in charge. Your position in the community and the industry may change, as well as the ability to generate the same substantial income.
Look for guidance on envisioning your encore, meaning what you will do after leaving such an incredible, high-impact career. Take stock of your relationships — with family, employees, partners and clients — to plan and build new avenues of connection.
Opportunity to leave a legacy
The independent advisory business is undergoing a transformation, as first-generation advisors begin to exit their practices in droves, or at least to hand the keys to the next generation of equity owners. This transition offers the opportunity to leave a legacy while at the same time harvesting what you have sown over many years of blood, sweat and tears.
It’s important to be prepared, however. If the ground has lain fallow too long, if the opportunity with the practice has been depleted or if the seller is not emotionally prepared to let go, an unfortunate legacy could be “what a wasted opportunity.”