As a financial adviser gets older, an issue that begins to loom large is how to successfully sell his or her practice and retire. It’s not a question that can be left to the last minute. Most strategies require a financial adviser to take a big step out of his or her comfort zone, and some can take 10 years to execute.
“It’s very infrequent where I see one small adviser sell to another small adviser, or even a larger adviser,” said Jay W. Penn, managing partner at Tru Independence, a consulting firm that provides services for financial advisers. “Even a one-man practice with $1 million in gross revenue isn’t worth that much because the revenue stream is totally dependent on one guy. If that guy leaves, how do you value that business?”
Penn says that an outright sale rarely succeeds because the client base for small advisers is a reflection of the adviser. Finding another firm with a culture that will mesh with his clients is very hard.
Use Partnership Approach
The most successful strategy is to gain scale and join with multiple partners. One partner can buy out the other partner, or the older partners bring in junior partners who will buy the firm over a period of five to 10 years. During that time, the new partners meet and become comfortable with all the clients.
Tom Sudyka, managing director of Lawson Kroeker Investment Management in Omaha, Neb., started as one of two young advisers hired to work for the firm. Over a 10-year period, the young advisers became junior partners, then bought out the founding partners. Sudyka and his partner are now bringing in two new junior partners to start the process again.
The founders structured the firm as a small corporation with 2,000 shares of stock. Each year, the founders had the firm independently valued on a formula that looked at revenue and cash flow. Then the two junior partners would together buy 10% of the shares out of their savings or with a loan.
“You want a nice continual flow and continuity for your clients,” said Sudyka. “We tried to get away from the broker mentality. From the time I got here, I went to meetings with Lawson and met all the clients. By the time we transitioned over, the clients were comfortable with the next generation of managers.”
Sudyka says that acquiring the next generation of advisers is a big issue for the industry. “They need to have the same philosophical investment approach and concern for clients as the firm in order to be a match and bring them on.”
Another way to get bigger is to partner with a company like Tru Independence. The consulting firm can take over back-office operations and noncore activities for a small firm. This practice gives advisers more time to prospect for clients and find potential partners. Tru Independence, which works with many small firms, often plays the role of matchmaker by finding potential partners from its large network of clients.
The challenge with this approach is that one- or two-person firms often can’t afford to bring someone on at full salary. To do it right, the firm needs to get bigger. One way is to acquire smaller advisory firms with younger talent. These younger advisers bring an existing book of clients with them and agree to buy the larger firm over a set number of years. The younger advisers have the desire to grow a firm but don’t have a large, established business. The older advisers have the larger business but have stopped growing. By marrying the two, the established firm gets a younger team to drive the growth.
However, often the established firm may not have the money to buy the smaller firm.
“It’s difficult to get financing from a bank on an unsecured basis for financial advisory firms that are small businesses with revenues of $3 million to $7 million,” said Bob Jesenik, chief executive of Aequitas Capital, a financial services firm in Portland, Ore. Aequitas can provide loans or purchase a minority stake to give an established firm the capital to acquire a smaller one.
The two firms value each other by assets under management, then get proportional shares when they come together as a partnership. Typically, the more established firm will have a higher ownership percentage, such as 70%, which the younger partners will eventually buy out. By bringing the younger team in as partners, the older advisers get a succession plan and seamless transition at the same time.
For full story go to Investor’s Business Daily.