How Advisors And Firms Actually Maximize Business For M&A Deals

Experts From Sanctuary Wealth, Berkshire Global Advisors, NewEdge Advisors And Householder Group Discuss Pre-Exit Growth Strategies
Larry Roth is CEO of Wealth Solutions Report and Managing Partner of RLR Strategic Partners.
Larry Roth is CEO of Wealth Solutions Report and Managing Partner of RLR Strategic Partners.

While much of the coverage in the independent wealth management space addresses advisor moves and M&A, it’s rare to come across industry news reports with insights on what exactly advisors and firms can do to improve their deal processes and outcomes.

For my part, I have strived to help fill that void in coverage through my Larry’s Takes atop our weekly Deals & Recruiting Roundups, which have covered more than 80 specific M&A deals involving wealth management firms so far this year. Taking the search for insights a step further in this article, I have looked at several crucial factors.

How advisors can maximize the value of their businesses. How late advisors can wait to maximize the value of their business when keeping an eye toward an M&A exit. How fast a business can realistically grow through scale. The extent to which near-retirement advisors are rethinking their affiliations, including whether it’s prudent to stay where they are now. What firms that have gone through a change-of-control consolidation can do to minimize advisor attrition. And how recruiters can win over advisors who have been part of a consolidation event.

A few of the industry’s leading voices – Vince Fertitta, President of Sanctuary Wealth; Bomy Hagopian, Partner at the M&A investment bank Berkshire Global Advisors; Neil Turner, Co-CEO of NewEdge Advisors; and Renee Farida, COO of Householder Group – weighed in with their perspectives.

Maximizing Value

Neil Turner, Co-Founder & Co-CEO, NewEdge Advisors
Neil Turner, Co-CEO, NewEdge Advisors

“It should be no surprise that advisors need to take a thoughtful approach to maximizing the value of their business if they are eyeing an M&A exit,” Turner says. “While acquirers want to see firms demonstrate organic growth, prioritizing growth at all costs can compromise a firm’s ability to maintain customer service or the well-being of its employees.”

According to Farida, in the ever-evolving landscape of financial advising, maximizing the value of a business with an eye toward M&A requires a balanced approach to growth and strategic foresight. For advisors, the key to enhancing the value of their practice lies in building a robust, scalable business model that not only attracts potential buyers but also sustains value post-transition.

That’s why she sees it as essential to implement and refine operational efficiencies. Streamlining processes, leveraging technology and optimizing client service models contribute to a strong, sustainable foundation that appeals to buyers. It’s also crucial to focus on client acquisition and retention strategies that demonstrate consistent revenue growth and a healthy client base, she suggests.

Assuming they generate the same amount of revenue in each channel, advisors who own their businesses typically take home 35% to 50% more income after all expenses than those being paid as W2 employees, Fertitta estimates.

In addition, he points out, independent advisors have revenue streams that employees of big banks and regional firms don’t have, resulting in higher top lines to go along with much higher margins. So, the annual income difference can be substantial and the compounding effect over time can result in a significant increase in net worth. The longer an advisor remains an employee, the longer that individual misses out on additional revenue potential, according to Fertitta.

Timing Deals

Renee Farida, COO, Householder Group
Renee Farida, COO, Householder Group

“Regarding timing, while earlier planning typically yields better results, it’s never truly ‘too late’ to enhance a business’s value,” Farida says. “However, advisors should ideally begin preparing for an exit at least one to two years before the anticipated sale. This preparation allows enough time to implement improvements and show potential buyers the trajectory of growth and stability.”

Turner notes that successful advisors who are near retirement may be lured by the highest financial offer, especially if they are rethinking their current affiliation. However, financial advisors who are satisfied with the way their current firm is serving their clients’ long-term interest – and have values aligned with Next Gen firm members – are more likely to stay, even if the payout is lower, he argues.

For Fertitta, unlocking an independent practice as an asset and positioning it to sell can wait until an advisor is just a few years from retirement. However, the downside of waiting too long, aside from missing out on the extra take-home income from being independent, is that the older one gets, the less energy they tend to have for the transition to independence. Also, the bigger the business, the bigger the exit multiple, he insists.

That’s because once independent, there is quite a bit of opportunity to grow an advisory business inorganically through M&A. Acquisition of smaller businesses at 2x to 4x revenue can lead to a sale of the larger, integrated business for 5x to 7x revenue, Fertitta estimates. But this can take several years. The more time between inorganic growth and the ultimate exit yields a larger multiple. Between compounding excess income and building enterprise value over time, the cost of waiting can be profound.

Yet growth for growth’s sake often can throw a wrench into an entire practice, Fertitta warns. In his view, advisor-owners ideally would prepare their business for one acquisition at a time and look for synergy beyond scale. Fertitta believes it takes two or three transactions before individuals feel like they understand the process and how best to take advantage of the transaction for the sake of the business. He advises to take a year to prepare the business for a transaction and create the plan, then consider one to three acquisitions over the first two years.

Farida emphasizes that, when dealing with rapid growth, it’s important to maintain a pace that aligns with the firm’s capacity to manage change effectively without compromising service quality or operational integrity.

Rethinking Near Retirement

Vince Fertitta, President, Sanctuary Wealth
Vince Fertitta, President, Sanctuary Wealth

For near-retirement advisors re-evaluating affiliations, Farida believes they should focus on how well their current environment supports their clients and growth objectives, particularly as they transition toward exit.

“I hear from advisors nearing retirement that they wish they had gone independent five years ago, but they don’t know if they have the energy today,” Fertitta says. “Their team is important to them and they know that it would be best for the next generation if they launched their own independent firm.”

Also, since cash flow and future monetization levels are so much higher in the independent space, successors are willing to pay the retiring advisor more than an employer’s retirement package and it is treated as capital gains rather than ordinary income.

However, most wirehouse advisors nearing retirement settle for their firm’s retirement program, according to Fertitta. He acknowledges that big firms have been masterful in locking up the next generation with these programs. Even so, a growing percentage of wirehouse lifers have been willing to make the move in search of a lasting legacy and higher net worth.

Minimizing Post-Deal Attrition

Bomy Hagopian, Partner, Berkshire Global Advisors
Bomy Hagopian, Partner, Berkshire Global Advisors

“Firms that have gone through a change-of-control consolidation-driven deal can utilize these tools to minimize advisor attrition,” Hagopian explains. Above all else, “Firms should ensure cultural alignment with the buyer as advisors tend to leave if there is a cultural mismatch.”

Next, she suggests that advisors who owned equity in the selling firm may be required to, or be given the option, to roll some of their equity into the buyer’s equity. Ownership in the buyer entity results in a broader partnership mentality among the advisors and increases the commitment level of advisors to the buyer, according to Hagopian.

Advisors also may be eligible to participate in the buyer’s equity incentive program, if applicable, which increases long term incentives and retention of advisors. In addition, owners of the selling firm may provide non-owner advisors with some participation in future transaction payments as a form of retention and incentive bonus pool.

The go-forward compensation structure also is important to retaining and incentivizing advisors appropriately, Hagopian notes. Finally, she has observed that advisors may be asked to – be or required to – sign restrictive covenants, including non-solicitation regarding clients and employees, and non-compete provisions.

For Farida, minimizing advisor attrition post-M&A hinges on transparent communication, maintaining culture and aligning incentives.

In Turner’s view, minimizing advisor attrition in the aftermath of a change-of-control consolidation cannot be effectively managed post-deal; it must be addressed beforehand. Therefore sellers must ensure that the acquiring company is a good cultural and operational fit for their advisors and that the new ownership can enhance the overall situation.

If there is any doubt that a change-of-control deal will benefit advisors, the deal should not proceed, as advisors will likely leave, and there will be no way to prevent this, he warns. But prioritizing the interests of advisors and clients in deal-making will make attrition a non-issue.

Recruiting Post-Consolidation

As for how recruiters can win over advisors who have been part of a consolidation event, Turner insists that depends on the intent and outcome of the consolidation.

It’s more difficult to lure away advisors in a transaction that results in a combined entity that provides more value to advisors than their previous situation. On the other hand, he points out, recruiters will find it easier to attract advisors if the consolidation did not consider the advisors’ and clients’ benefits or failed to communicate the value effectively.

Farida argues that recruiters can attract advisors affected by consolidation by emphasizing stability, growth opportunities and cultural alignment within the new entity.

“In summary, maximizing business value for an M&A exit is a meticulous process of strategic enhancements and timely preparations, ensuring that the business not only attracts the right buyers but also secures a legacy that persists beyond the sale,” Farida says.

Larry Roth is CEO of Wealth Solutions Report and Managing Partner of RLR Strategic Partners.

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