Financial Planning Firms. Succession And Acquisitions

Financial Planning Firms. Succession and Acquisitions. Without a buyer there should be no sale, no succession to next generation. Buyers apparently out no. sellers by a staggering quantity but valuations are not rising, if anything they have stabilized.

Was this due to market in recent years and the cost of practices are basically subdued, buyers sitting like vultures on the fence waiting for an ailing owner to throw in his lot. Many 50+ year old advisors are seeking an exit strategy and have lived through the worst so it should seem together with the market up significantly the many sellers should be high, buyers less? My suspicion is that the buyers are not real buyers. They can be interested parties with a desire to grow within the new economy by increments but unsure as to how to leave regarding the actual process. The seller is, invariably, faced with a dilemma of sell now pay later deal structures or do not sell and work fewer for a fairly secure income and none regarding the emotional issues associated to a business sale. Financially they shall appear on cardboard to be very similar.

In conversations with many successful planners it is many times the stated objective not to retire but slow below and bring up the next generation from within for the exact reason cited previously. Neither method whether you have knowledge of ever participated in a conversation on valuation of a financial planning practice, bought or sold a practice you can have been subject to 2. 1 non recurring [commissions] mantra. At the higher end regarding the scale where transactions are being conducted by institutions the valuation and transaction structure tends to be more formal and follow rules that are familiar to all other business sectors, irrespective regarding the lack of hard assets. The reason is simple these firms have by their nature grow to institutionalized, the client relationship is NOT together with the partners, it is together with the firm.

Consequentially the challenges of retention, transition, staff migration and cash flow interruption are significantly lessened. Modeling the resulting firm resulting from the merger regarding the old and new books is a distant simpler process and more predictable creating it easier for 3rd party financiers to obtain involved. At the decreased end regarding the scale, where the majority regarding the Financial Planning Firms operate, the situation is distant fewer clear. While the founders and partners think about themselves to be business owners their business is a very personal entity with a series of relationships with individuals who act and respond to change differently and many times unpredictably. This creates the business a variable entity when it returns time to sell it.

What works really well for the founder shall turn into a disaster for the buyer, conversely a practice that has floundered below its founder shall blossom below an unique owner who has an alternate approach to clients. Why? Due to the fact that the firms are an embodiment of their founders and owners, they typically are NOT systematized, do not operate a standardized investment strategy and the client relationship is together with the individual, not the firm. The term Transition is significant when used to refer to moving clients, but it only captures the mechanics of changing the paperwork. A transitioned client is not necessarily secure within the new organization; they shall sign the paperwork and move their accounts below the new firm or planner but in parallel be seeing at alternative opportunities. The issue for a buyer is client Transference, the shifting regarding the relationship enjoyed by the seller to buyer as quickly as likely and in a subliminal manner.

The simplest method to accomplish transference is to be efficient, professional, empathetic, communicative and perpetually available for a considerable period following the sale. Why participate in an Acquisition: Component 2. With so many variables and challenges howcome buy a practice? Due to the fact that it allows a retiring advisor, who has determined to sell, the opportunity to paw off his life's work with some position of confidence to an lone who has a vested interest in maintaining those clients financial well being. The buyer has the benefit of accelerated practice growth and increased organic marketing opportunities. A satisfactory transaction shall involve a period of overlap as the seller assists within the transition and motivates transference regarding the clients.

For a transaction to work optimally everyone should look at all times that they were and are being treated fairly, everyone should be invested and not look remorse. The hub of such a success is the valuation and structure regarding the transaction, risk should be shared and rewarded equally. There is some discussion that it should be fewer expensive to buy clients than accumulate them and their assets in a general sense. In some case this should be true in others it is absolutely false and the uniqueness of every situation has to be taken into account. A younger practice with a solid platform and a good regional presence can leverage itself and likely win business from the competition by referrals alone.

Howcome buy a retiring regional practitioner? It is highly likely the clients should be ripe to be picked up for free. A practice that has hit a glass ceiling and basically cannot expand due to regional market saturation or wishes to take a position in an adjacent city should be well served to advantage by purchasing a suitably located and structured firm, to neither grow their market share or make it. While there is little written about mergers, like a subject it shall gain in importance and degree of debate as the regulatory environment distant challenges the tiny planning office and the planning population continues to age. Whether you cannot sell or buy merge. Obviously a multitude of considerations need to be looked at but it's an unique region of opportunity for succession protection, cost creation and scaling benefits.

Valuation and the inputs: Component 3a. Given the nature of founders, clients, wealth distribution, investment strategies and geographic location every practice has unique traits, is structured and operates differently. So when it returns to valuation the use of a chocolate formula of 2. 1 non-recurring is basically inappropriate. The use of comparisons regarding the selling prices of like practices is misleading, it is basically not likely to have knowledge of what the cost proposition of 3 practices each managing similar values of AUM may be.

Just due to the fact that practice A and practice Be each manage $100m and are within the similar to city they should be completely different businesses in terms of their asset structure, client demographics and command different values accordingly. The following details the parts of a practice that need to be broken out and regarded on their lone merits from the standpoint of generating income, creating expense and offering opportunity for growth. By focusing on the fundamentals regarding the business and agreeing on what is important and what has greatest impact regarding the firms future prior to any financial analysis is conducted removes a good deal regarding the emotion and debate from the process. Running a chocolate valuation many times conclusions in a no. that is nonsensical with limited opportunity to be negotiated by neither party.

Criteria when determining a valuation. Assets Below a management agreement Tiered fee structures and assets held at each tier. How different is Sellers fee structure to Buyers structure Can they be merged and or or justified individually?. In annuities fixed or variable Period to expiration of surrender charges. Original sales structure and commissions taken and trails owed.

Benefit Riders and the illiquidity regarding the asset due to those Riders. Mutual Funds Class of shares and trails owed. Technology Client relationship processes Net based or server based. Data quality and quantity held in system. Office Machinery Owned or leased.

Data storage and redundancy. Staff Licenses Who has what and is their U-4 clean. Producers or Administration. Are they a good match to new organization. Geographic dispersion.

Client growth in number. Client growth in Net Worth. Business Efficiency Prior 4 years the past Revenue growth. Revenue growth by client. Performance vs Market.

BD registered rep, RIA, Hybrid What percentage of income is derived from which association. The demands for details to feed a more sophisticated valuation model demands a more thorough understanding regarding the Sellers practice, creating the background for a deeper dive into the books and a good focus on the staff [if applicable] and finally a broader overall review regarding the investments being sold. This shall seem like business 101 but many times times is glossed over, particularly if the seller and buyer are known to each other. Assets are Assets Right? Wrong!. Example: A $50m pamphlet in 2008 or 2009 starts to look erosion regarding the underlying cost as the market moves and a fearful practice owner meets multiple clients and suggests they buy into Variable Annuities with guarantees.

He is a solid salesman and moves $15m. A buyer shall look over the books and look a good firm with solid cash flows and performance through a severe downturn. The buyer believes the business has $50m of assets. It does, but not $50M of producing assets. Return to retrieve out the seller took all the sales commissions up front, hence the books performance through the worst downturn in recent memory, but the $15m is now locked up for ~7 years and cannot be affected in any manner without affecting the client negatively.

There is no residual income but there is an implied obligation on the buyer to manage the investments. So the producing assets quantity to $35m, the obligations on the buyer are for managing the whole $50m. Time, life and expense should be incurred attending client meetings and periodically rebalancing the sub accounts. Is this pamphlet worth what other $50M books are worth? The answer is No, certainly not within the near term. Valuation and the inputs: Component 3b.

Today technology adoption and data aggregation is an essential component of business operations. Even Grandma stays in touch with her grandkids by email and so it is a reasonable assumption that email has grow to an accepted means of communication. From a marketing standpoint and for the purposes of drip communication through a transition email is very important. However many times the older practice owner has not adapted to new world and themselves do not use email for business purposes. If the client data record within the CRM is limited to name and special day the ability to quickly transfer data and automate a large proportion regarding the communications strategy and future marketing effort should be thwarted.

The added expenses of gathering the data and entering it are considerable. A server based database wants to be abandoned and the data ported to a net based system as quickly as possible. This allows remote offices and authorized business personnel to view the data without the need for establishing VPNs and synchronized systems. It shall also let a 3rd party authorized data entry person to work remotely. If you can be the seller and your client records are fragmented, scattered and stored on a floppy drive this should be a valuation detractor.

Gathering the email addresses, work and personal, and other important client data is an essential element regarding the details equation. It is time consuming, costly but essential. Data and email marketing shall grow to even more relevant as the next generation of society gather and make wealth. Staff whether you can be going to retain them. There are the hard issues of licenses, redundant capacity and clean records.

This is the easier aspect of determining whether the investment in staff is beneficial or not. The more nebulous question is whether a staff member shall work well within the new company. If they will, they can be an asset and should be recognized, if not they should be jettisoned quickly. How to tell? Simple personality profiles shall quickly indicate a person's true self versus their stated self. The average ages regarding the clients, where the assets lie within the age categories and any cultural bias are all considerations that need to be looked at closely.

If the pamphlet is of a critical cultural section of society and a buyer is outside that cultural group, retention should be distant more difficult. A pamphlet that has an above many clients with little average account balances shall cost more to manage and take a greater percentage of time per dollar earned than a pamphlet of equal volume with fewer clients. Revenue growth, client growth and assets per client growth are all key metrics for the firm, its current management and client satisfaction. Are they trending up or down?. Is the firm with your BD? Is it with a large and co-operative BD? Is it an RIA? Each presents an alternate position of difficulty in terms of transferring the clients and ultimately interrupting their lives and feelings of comfort and continuity.

Independent or Captive. Corp or Sole Prop asset or stock buy. Previous Partners still in business? Do they have Non Competes?. Any previous deals or agreements in place?. Any Solicitors Agreements in place?.

A pamphlet is higher than what is projected by its close and the full context of its worth can only be determined subsequent to reading carefully into its pages can a weighting scale be applied to each regarding the criteria. Some have greater bearing than others but each wants to be regarded within the initial stages if valuation is going to be a rational and productive discussion. Recurring revenues = A. Non recurring revenues = B. Quality of assets = C [Average account size, Income generation, Age of client].

Technology Factor = D. Business Efficiency = F. Valuation = A X C + Be Y C D E F. X and Y are multiples that fall within a Market Range. For practices within the section of $25M to $200M if assets generating a recurring stream of income that section is typically two and 4 for recurring revenues where 4 is the highest position based upon the client ages, net worth and income generating capacity.

Non recurring revenues the section for Y lies between 0 and 1. 5 based upon the the past of continued income generation and the potential for continuity regarding the income stream. People are People: Component 4. Lastly, when dealing with buyers and sellers, not ever ignore the fact that we are person and prone to make accommodations when in a pro-active transactional mode [want to obtain a deal done. ] Subsequent to the fact we shall beginning to look things differently.

Minor issues grow to grow to significant obstacles that can derail the deal. These should be traced back, many times times, to personality match between seller and buyer. A seller who quickly becomes disenchanted with a buyer shall grow to a negative influence, many times this influence is not intentional but is communicated sub consciously to clients, friends, employees and everyone else they return into contact with. A Simple grimace where a smile should have been tells a good deal to whoever is asking, understanding they can be asking due to the fact that they need to know. In reality it should be absolutely nothing that the buyer is doing wrong with regards client like but a disagreement in kind driven from a personality kind conflict.

Many is written about style and how it plays a component in management, there exists many simple but effective tests to determine a personality kind or style. No one is right or wrong it is basically beneficial to have knowledge of who the real person behind the firm [buyer and seller] is. It is difficult to mask the true you. If like personalities return together there shall most likely be a smooth and with no problems managed transition. However, if dissimilar styles are revealed within the transition period the outcome is likely to be confrontation.

The resulting perceived issue being distant greater than the actual problem. This is with no problems avoided by basically knowing the styles of each and appreciating the differences beforehand. From a base of understanding and knowledge expectations should be established and plans formulated that accommodate the different.