One of the ironies of the advisory business–an industry built on the wisdom of seeking professional advice–is the reluctance of many advisors to retain professional counsel to address issues outside their expertise. We see this most frequently when advisors are making one of their most important business decisions: the sale of their practices. I'm basing this observation on the frequency of calls we get from advisors asking if they think the offer they got from a prospective buyer is fair. Unfortunately, that's like asking if the premium on a universal life policy is fair: in both cases, there are a lot of factors that go into a fair price, and if you've gotten this far into the discussions without help, it may be too late to get a good deal.
Their reluctance to seek assistance early may be because of the confidence advisors have in their own ability to evaluate financial matters. That said, I suspect a more common reason is "feesophobia," meaning the fear of spending money on professional advice when they are not certain if a transaction will get done. Unfortunately, just like clients who think they can manage their own wealth without professional advice, many advisors fall into a trap that may cost them many times more than the money saved by not hiring an expert.
Most advisors are intimately involved in only one sale of a business during their careers: their own, but as with any skill, the ability to successfully joust and parry in negotiations is greatly increased with experience. Experienced dealmakers know that the vast majority of the value in a transaction resides in the terms, not in the price. By not understanding how those terms affect value, advisors can leave a good six or even seven figures on the table.
As it turns out, there are often 15 or more deal points to resolve in a sale, merger, or acquisition [see sidebar]. Perhaps the most daunting challenge for advisors who eschew professional help is that they fail to anticipate their own emotional involvement in the sale of a business.
Determining the correct type of professional counsel to engage for assistance in mergers, acquisitions, or sales of financial advisory businesses depends on size of the business and the nature of the contemplated transaction. The choices range from engaging an investment banker, to working with a business broker, to seeking hourly consulting advice from CPAs, lawyers, appraisers, or other consultants.
Easing the Transition
In the late 1990s, leading broker/dealers such as SunAmerica Securities (now part of the AIG Network of B/Ds) and Mutual Service Corp. developed Web-based platforms for their registered representatives to sell their books of business. Others developed written manuals to guide their reps through the transition process.
Since then, other broker/dealers and custodians have implemented their own initiatives to assist advisor clients in the process of buying and selling a practice (I have been involved in some of these initiatives.) Schwab Institutional has created schwabtransition.com, a Web-based listing platform provides referrals to bankers and consultants, and helps buyers and sellers off-line to match up with each other. Fidelity Registered Investment Advisor Group (FRIAG) also has introduced a transition initiative for its RIA customers. Like Schwab's, the program offers access to professional resources but does not include a Web-based listing service. TD Ameritrade is also embarking on a succession initiative for its affiliated advisors though as of this writing, the program has not yet been fully developed.
The Investment Bankers
The leading investment-banking firms for financial advisory businesses valued at more than $10 million are Berkshire Capital and Cambridge Partners. DAK Associates, a firm based in Pennsylvania, has targeted the market slightly below that size. Prominent investment bankers such as Putnam Lovell NBF Securities, Inc., Goldman Sachs, Merrill Lynch, and Lazard Freres serve the high end of the RIA and broker/dealer market.
