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

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

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

10 Reasons to Professionally Value Your Business

Posted by FP Transitions on Nov 28, 2018 2:08:05 PM

10 Reasons to Professional Value Your Practice

Experienced business owners recognize the importance of tracking and monitoring the value of their practice over time. They know their practice is their most valuable asset, and by valuing it, they are empowered to grow, protect, and realize the value they have built.

Following are ten situations where it’s essential to have a current value and accurate understanding of your business.   

1. Increase Value

To cultivate growth and increase the value of your business, you need to have a starting point—a place to grow from. An accurate and comprehensive valuation will identify value drivers and growth opportunities, allowing you to create an informed growth strategy and make changes that will improve performance. The ability to track those changes and the value of the practice year after year enables you to see your progress and ensure your growth is on target

2. Benchmark Your Business

Tracking your value year after year allows for accurate benchmarking of the business. A thorough benchmarking report will look at your business and compare it to similar-sized businesses in the market, evaluating your company’s standing against the competition. Benchmarking reports reveal how your business stacks up against your peers as well as against leaders in the industry.

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Topics: Succession Planning, Acquisition, Business Growth, Business Value, Benchmarking, Valuation & Appraisal

Which Exit Path is Right For You?

Posted by FP Transitions on Sep 20, 2018 11:53:53 AM

Which Exit Path is Right for You?

You’ve built a business providing financial insight to a growing community of clients. You’ve fostered this relationship over the years and established a trusted role in their lives. As your clients have moved along their journey as professionals, entrepreneurs, investors, or heirs, they’ve turned to you for advice at each step; and now they are counting on your business to be there and to see the process through to the end. This means that as your clients transition into their own retirement, they will depend on your services more, not less. Regardless of the plan you choose, it is your duty as an independent financial professional to have a plan for client service and support that extends beyond your own career.

One way or another, your path as a financial planner will come to an end. The question is whether or not you’re going to exit on your own terms and in your own way. Are you going to create a plan for your exit that preserves the value and growth of the business you’ve spent your career building? Are you going to make sure your clients’ assets are in good hands for the length of their lifetimes, not just for the length of your career?

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Topics: Business Growth, Business Value, Sustainability, Benchmarking, Enterprise

Maximizing Business Growth Through Benchmarking

Posted by Marcus Hagood on Sep 14, 2018 8:48:16 AM

Maximizing Business Growth Through Benchmarking

The average advisor faces a difficult and increasingly competitive industry. With industry consolidation, technological advances, increased competition, more regulatory oversight, and the need to recruit and retain talent, it has never been more critical that financial advisors use benchmarking as part of their ongoing strategic planning process. With benchmarking, a business owner can improve their relative revenue and expense performance, organizational structure, and marketing results to support growth and achieve short-term and long-term goals. Used in conjunction with your business planning process, benchmarking is a powerful tool to track and build additional enterprise value.

What is Benchmarking and Why it is Critical?

Benchmarking is defined as a measurement of the quality of an organization's policies, products, programs, and strategies as compared against standard measurements of their peers and “best-in-class” providers. An effective benchmarking program provides insight into the connection between your business decisions and the resulting outcomes.

Benchmarking improves performance by identifying and applying demonstrated best practices to sales, operations, and procedures. Comparing the relative performance of their products, services, and sales both externally (against competitors) and internally (with ongoing operations and business decisions) ensures that performance meets or exceeds the competition. The objective of benchmarking is to find examples of superior performance and understand the business practices driving it. Effective business owners utilize benchmarking insights to improve by incorporating these best practices, not through imitation, but through innovation.

The Four “M's” for Incorporating Benchmarking into Business Planning

Every firm has unique needs for benchmarking. For example, the goals of a mature firm versus that of a start-up practice may differ greatly. More established business and solo advisors might be more likely to utilize benchmarks to implement changes that result in increased efficiency and profitability. By contrast, a young developing practice may be more focused on driving and managing growth in clients and revenue.

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Topics: Business Growth, Business Value, Sustainability, Benchmarking, Enterprise

Reminiscing About the Future : 20 Years in the Making

Posted by David Grau Sr., JD on Aug 27, 2018 7:00:00 PM

Reminiscing About the Future

The foundations for FP Transitions were laid in 1999, and that makes our company officially 20 years old this year. I founded this company thinking that I knew a lot more about running a business than I actually did at the time. Armed with a law school diploma and a lot of energy and drive, I thought I was ready to conquer at least a small corner of the business world. Turns out that running a business takes experience and business knowledge.

Along the way, I picked up an important axiom from a local legend who said, “Don’t confuse activity with achievement.” He was right, but it took me a long time to understand the difference. In retrospect, the first ten years of our company were characterized with a lot of activity; the last ten years is where the achievement took place. The difference maker for us was hiring an outside CEO, Brad Bueermann, to come in and help us turn our activities into achievement on a national scale. Until then, I confused being very busy with being very successful, or at least constantly being on the verge of success. Everything revolved around me and the lawyer in me silently rejoiced. But this wasn’t a good, long-term model because eventually I ran out of time and energy. And I got older!

Advisors often mistake activity for achievement too, thinking that their one-owner practice that is 90% or more fee-based and that grows steadily at 10% or more every year is proof that they have built a business and that success has been achieved. I see a lot of independent advisors building what I call “books” and “practices,” but not very many building sustainable businesses. What I’ve learned over the past twenty years is that, while it is incredibly satisfying to have a practice that revolves around the founder, that isn’t a durable model, and it is not “a business.” At some point, if a practice is to outlive its founder and provide services to the clients for their lifetimes, and not just for the length of the founder’s career, significant changes need to be implemented, and the sooner the better.  

Early on, we grew fast and I became totally focused on our top-line success and growth rate. But there came a time when it was clear that without strengthening the foundational aspects of our business, it would never grow past a certain point. I had to move myself out of the center of operations and learn to build and run a business like a shareholder, not like the star attraction. Making myself a part of a stronger, more diverse, and younger team of professionals was hard, but very necessary – more than just changing my leadership style, we had to change the culture of our operation and, frankly, that was beyond my skill set. So, we brought in outside help – people who knew things that I didn’t – and that made all the difference. 

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Topics: Business Growth, Business Value, Next Generation, Sustainability, Building Your Team, Enterprise

Top 10 Drivers of Business Value

Posted by FP Transitions on Jan 24, 2018 9:23:30 AM

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The value of your practice is determined by many factors, some obvious, and some not so obvious. Even if the idea of exiting the business is far down the road, as an owner you need to consider the ten factors below as part of managing and growing the practice. Focusing on these areas can make a major difference in your book’s sustainability and its eventual purchase price (when transition time arrives).

The purpose of this article is not to review the theoretical aspects valuation or create an exhaustive list of factors that influence your value. That would be a much longer, technical article–which can be viewed here. The point here is to highlight the drivers that can help give your value an extra boost in the right direction. These factors include:

  1. Predictable revenue and recurring revenue streams
  2. Client demographics
  3. Average client tenure
  4. Size of potential market
  5. Transition timing
  6. Client affluence and average client revenue
  7. Asset or revenue concentration
  8. Use and structure of referral fees
  9. Length of surrender period
  10. Profitability

As you look at your practice with an outsider’s eye, you will see avenues that help grow the business and make it more robust. 

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Topics: Business Growth, Business Value, Buying & Selling, Sustainability, Benchmarking, Valuation & Appraisal

Predatory Buyers

Posted by FP Transitions on Nov 30, 2017 11:50:09 AM

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In our second book, Buying, Selling, and Valuing Financial Practices (the M&A Guide), we introduced the term of a “predatory buyer” to our readers. If you are thinking about selling your practice one day, you need to understand how certain buyers will approach you, how to protect yourself, and what, or who, to watch out for. In this article, we will answer these important questions for potential sellers:

  1. What exactly is a predatory buyer?
  2. Where do I look to find a qualified and capable buyer, AND realize the full value of what I’ve built?
  3. What is the difference between selling value and realized value?

Predatory buyers don’t actually announce themselves. Still, there are telltale signs and, unfortunately, it’s often the outcome of negotiations that signals it was a “predatory” deal. In this case, the term applies to a group of well-funded and capable acquirers who buy everything and anything within a single independent broker-dealer (IBD) or custodian but do so with complete disregard for market value or professional deal terms. Such buyers typically acquire smaller books at the rate of one or two per year. These buyers are skilled at getting what they want. Indicators include proposing pure split revenue buyout offers, using rules of thumb based on multiples of revenue or earnings, discouraging a valuation of the practice (“it’s really just not necessary”), and creating deal terms that create a “heads I win, tails you lose” sale.

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Topics: Selling Your Practice, Business Value, Open Marketplace

5 Compliance Mistakes You're Probably Making

Posted by Rachel Beckwith on Oct 17, 2017 1:28:00 AM

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Compliance is a “have to” in the financial services industry. Advisory firms are required to have a compliance officer or a designated third-party compliance administrator. While your business might technically meet internal compliance requirements, there’s much more to consider in order to keep your business protected from regulatory scrutiny.
 
We recently teamed up with Bates Group to film a series of special Roundtable Talks centered on the importance of staying on top of compliance. One of Bates Group’s Managing Directors, David Birnbaum, JD, joined us to talk about the ways to achieve good compliance management, as well as how it can impact the value and growth of your firm. From these conversations we’ve found the following five compliance mistakes to be the most common to many financial services businesses.

1. Neglecting Internal Compliance Audits

If you wait until you’re faced with a regulatory audit to look at your policies and operating procedures, you’ve waited too long. By reviewing the business periodically, you’ll not only be able to head off potential issues before they arise, but you’ll be prepared for any observations a regulator could make during a compliance audit. In addition to the security in knowing everything is running smoothly and within regulation, you’ll also be able to confidently answer any questions a regulator or outside party might have about your business.

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Topics: Acquisition, Business Value, Roundtable Talks, Compliance

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