Tibergien, Seivert Debate 5 Critical M&A Questions for Retiring Advisors

If investment management is a core proposition of an advisory firm it should own it because that will yield higher revenues, but in the current market, financial planning is a more valued offering, said Tibergien.

As a result, more firms now offer asset allocation services and outsource investment management rather than maintaining it in-house, which costs money for research staff and time, said Seifert.

It follows then that "there is a wider pool of buyers for open-architecture firms than for firms with proprietary investment management," said Seivert.

The audience favored Seivert's position by a vote of 85% to 15%, but Tibergien noted that the trend toward open architecture makes it harder for advisory firms to maintain the price structure they have set, based on AUM, when investment management is not their key offering.

3. Holistic or Narrow Service Offering?

With the move away from proprietary investment management comes a broader, more holistic offering of services from advisory firms, essentially a "one-stop shop" for clients, said Tibergien.

That sounds good for clients, but it can involve potential conflicts. One-stop firms may have a greater incentive to cross-sell products that a client doesn't need or want and to sell more expensive products and services, said Seivert. In addition, he noted, in those circumstances it's not clear who "owns" the client, who is most responsible for making sure that the client receives the services he or she needs.

The audience overwhelming endorsed holistic services versus a narrower offering by 2 to 1.

4. Sell to an Internal Successor or Outside Third Party?

There are pluses and minuses to both types of sales, but even those are subject to debate.

Selling to an insider allows the continued connection between clients and staff and increases the probability of a successful transfer of power and the future success of the firm, said Tibergien.

Not necessarily, said Seivert. An internal sale "can tear a firm apart, causing irreparable damage," since only one or few current insiders will become the new owners. In addition, he said, the buyers usually have no experience running a firm and the firm's price won't benefit from a competitive process, which could increase its value. Selling to an outside entity usually involves a premium price; selling to an internal successor, a discount, said Seivert.

Tibergien didn't dispute the price discount/premium argument but asked whether selling to an outsider can insure that the business will last. "The reality" is that 25% of firms continue for a second generation and only 10% last for a third, said Tibergien.

The audience was almost evenly divided on who makes a better buyer, an insider or outsider.

5. Take Cash or Equity in a sale?

Cash carries no risk and can be invested in a market that's more liquid than an advisory firm, Tibergien said. An equity stake, however, can grow, providing the seller a greater upside than a cash payment would, Seivert noted.

"It all depends on how a deal is structured and the reinvestment risks in the public market, said Seivert.

He recalled a working with a client who was planning to sell his firm to an outside buyer but died a few months later. His wife subsequently sold the firm in an 80/20 cash/equity deal, receiving $3 million in cash and holding a stake worth $20 million several years later. Like profitability and growth, advisor-owners don't have to choose between cash and equity. They can choose both.

— Check out Advisors Need Critical Mass to Thrive by Mark Tibergien on ThinkAdvisor.