TRANSITION TALK

Components of a Deal

Posted by Ryan Grau CVA, CBA on Jun 12, 2019 6:00:00 PM

Whether you are buying or selling, it is important to understand what is being bought and sold and what expectations both the buyer and seller have of each other. Absent these details, it is difficult, if not impossible, to determine if an offer is fair. After all, “fair” is a relative term. The question of fairness would be easy to answer if all deals were done the same way, but the reality is they are not. Nonetheless, there are still common attributes to most deals that can shed light and aid in understanding the underlying terms. This in turn helps both buyer and seller assess the reasonability of an offer. 

WHAT IS BEING BOUGHT AND SOLD?

The sale of many, if not most, financial service businesses are completed as asset sales as opposed to stock sales, where all ownership rights are transferred to a third party. In an asset-based sale, both buyer and seller receive more favorable tax treatment when compared to a stock sale. Since financial services businesses are primarily relationship-based, providing mostly intangible services, what is being sold in an asset sale is rights to a future benefit stream—namely, revenues. However, given the intangible nature of the assets, there is no certainty that a buyer will receive the same amount of revenue from the clients as the seller did. This is why the ability to leverage the seller’s goodwill (the primary asset being bought and sold) to establish proper deal terms that create a shared risk, shared reward scenario become important. 

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Topics: Business Value, Deal Structure, Buying & Selling, Trends in Transactions Study, Transactions

SOLD : April/May 2019

Posted by FP Transitions on Jun 6, 2019 7:54:02 AM

FP Transitions is pleased to announce the recent sales of financial services businesses in the following areas:

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Topics: Selling Your Practice, Acquisition, Buying & Selling, SOLD

Technology and Value

Posted by Jeremy Seicianu, CVA and Ryan Grau, CVA, CBA on May 14, 2019 11:23:18 AM

Tech and Value

Advisors constantly seek an answer to the questions “How can I grow faster?” and “How can I increase the value of my practice?” Generally, their focus is on acquisition. However, growth and value are not singular concepts. In other words, achieving a rapid pace of growth needs to be tackled through multiple facets, and ultimately, growth will be a driver of value. However, many practices are not adequately equipped to grow at the rates they are striving for. Technology provides many of these opportunities. Investing in technology has a demonstrated relationship to higher growth, more affluent clients, increased profits, and increased value. 

The rapid pace of technological advancement has provided financial advisors more opportunities to reach a broader client base and manage client relationships more effectively and efficiently. By implementing and effectively utilizing web-based advertising, digital conference rooms, client relationship management (CRM) systems, and billing and portfolio management software, advisory practices of all sizes are able to more closely track their performance and focus their efforts on the market segments they wish to target.

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Topics: Business Growth, Business Value, Trends in Transactions Study

Impact of Consolidation

Posted by David Grau Sr., JD on May 8, 2019 1:09:44 PM

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There has been a fair amount of talk over the past decades about consolidation in the financial services industry. Most of the white papers and articles addressing this concept have presented it in a negative light as though it signals the end of the lifestyle practices that dot the landscape in this profession. Industry regulation, growth, technology, fee compression, competition, and aging advisors forced smaller practices to consolidate just to survive. At least that was the working theory.

As the original organizers of the open marketplace for independent advisors seeking to sell or to acquire, we have a slightly different perspective on consolidation; we view it in a very positive light. Consolidation looks very different than what the prognosticators laid out decades ago. From our vantage point of working with businesses below $2 billion in AUM, we’ve observed the industry is indeed experiencing some consolidation, but not only due to acquisitions or roll-ups by companies like Focus Financial, United Capital, or Dynasty. The consolidation that we see every day is owners of stronger, sustainable enterprises acquiring smaller, one-generational books and practices.

Viewed in this light, how better to look after 250 clients or households when a single-owner advisory practice nears retirement than to find a very similarly structured business that can step in, take over, and provide for the staff members as well? This process works for the buyers, the sellers, and, most importantly, the clients.

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Topics: Multi-Generational Ownership, Organizational Structure, Business Growth, M&A, Sustainability, Trends in Transactions Study

Coming Soon! Trends in Transactions and Valuation Study

Posted by FP Transitions on May 2, 2019 2:37:22 PM

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Our new Trends in Transactions and Valuation Study includes expert insight, commentary, and predictions for the state of the financial services industry. The study dives into last year’s M&A numbers and examines how industry businesses and their values have evolved over the last five years.

This comprehensive, 50-page study features:

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Topics: Business Growth, M&A, Business Value

Rights and Obligations of Equity Ownership

Posted by Kem Taylor on Apr 18, 2019 9:21:21 AM

Rights and Obligations of Ownership

As more wealth management businesses look to internal succession, more new owners are being created. As a next generation advisor, you should consider whether ownership is the right path for you, and it is important to understand what ownership entails. Owners of a privately-held business, even with a minority position, enjoy several rights and privileges in exchange for their investment in the company, but they are also responsible for meeting certain obligations.

The following rights and responsibilities apply to all owners whether the business is a corporation governed by bylaws or a limited liability company with an operating agreement.*

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Topics: Succession Planning, Multi-Generational Ownership, Business Growth, Next Generation, Sustainability

SOLD : February/March 2019

Posted by FP Transitions on Apr 10, 2019 10:26:03 AM

FP Transitions is pleased to announce the recent sales of financial services businesses in the following areas:

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Topics: Selling Your Practice, Acquisition, Buying & Selling, SOLD

The Sell and Stay® Strategy

Posted by Rachel Beckwith on Apr 2, 2019 1:50:50 PM

The Sell and Stay™ Strategy

Everyone has a unique vision of their future; we’re all trying to forge a path with our careers to that end goal where we can take a big breath and simply enjoy the life we’ve earned. While we might have an idea of the specific journey we will take, it’s important to remain open to alternate routes and unexpected shortcuts along the way. The hardest step on this journey for most is that which takes them out of the professional world they’ve been a part of for many years.

Unique goals and unique journeys require a creative strategy. For financial advisors, the Sell and Stay® path offers flexibility and freedom for an exit from the industry. There are advisors in the industry who have built a team of advisors with next generation owners and have built an internal transition into the sustainability of their business. The majority of our industry, however, is still made up of single-owner practices. Luckily, Sell and Stay® offers them the option of a similar exit path.

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Topics: Succession Planning, Selling Your Practice, Exit Planning, Sell and Stay™

Creating Collaborators Instead of Competitors

Posted by FP Transitions on Mar 18, 2019 4:38:46 PM

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A large percentage of advisory businesses use some form of revenue-sharing arrangements, or an eat-what-you-kill system that rewards sales and production tied to the top line, not the bottom line. This is true of small practices as well as larger businesses. “Fracture lines” are built into the practice model as individual books or practices are built in an environment that starts out collaboratively but most often ends up creating competitors. 

It’s important that independent advisors move away from obsolete practices and improper building tools held over from experiences in the wirehouse world. Creating a sustainable and valuable business should be the goal of every advisor. Building efficiently and effectively takes the proper tools, the proper structure, and the proper team.

Advisors need to embrace the most powerful and lucrative tool they have: equity. Equity is the value of the business separate and apart from the cash flow and compensation paid for work performed.

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Topics: Compensation, Succession Planning, Revenue Sharing, Building Your Team

Preparing to Sell Your Practice

Posted by David Grau Sr., JD on Feb 28, 2019 1:08:03 PM

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The vast majority of today’s independent advisors only consider the option of selling to a third-party when it is time to retire or significantly throttle back as a last resort. Many advisors prefer a path with internal successors that allows them to exit gradually while building a strong, sustainable business. Many of these same advisors, however, come to realize too late that that process takes a fair amount of time, skillful execution, and next generation talent. As a result, a third choice emerges: that of attrition, which for most advisors is less of a choice and more of a default–keep working, enjoy the income, and let the practice slowly wind down if no better option emerges.

Attrition, however, involves a gradual drop off of clients, revenue, and value. It does not consider the future of all of the clients who have relied on their advisor for years. To avoid attrition, advisors should consider a sale to a third-party and exit in a professional and contemplative manner before any value is lost and clients are left to find a new advisor on their own. The brief exploration that follows can help to remove some of the mystery and many of the myths around the exit planning process and make it a higher priority choice. 

This external sale process is one of several “exit plan” paths, but it is often the best (and most lucrative) choice for certain advisory businesses–especially those who are otherwise facing attrition. Selling your practice to a third-party is the fastest of all the exit strategies, and something to consider depending on the circumstances and your needs. In most cases an external sale can produce a more liquid transaction with substantial, non-refundable down payments of 30% to 80% of the selling practice’s value. In the current sellers’ market, obtaining fair market value on very competitive terms is well within reach of the average selling practice owner. Setting up a practical and successful exit plan is about structuring a deal that works well for everyone.

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Topics: Selling Your Practice

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