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M&A Veterans Dish Advice to RIA Owners Selling their Practices

By Garrett Keyes June 29, 2018

RIA practice owners may be missing key information needed to successfully sell their RIA firms, Greg Fink, president and CEO of ACG Wealth, which advises $2 billion in client assets, says in a recent white paper.

Fink says FAs wishing to successfully sell their RIA practices must use discounted cash flow (DCF) analysis to accurately value their businesses, correctly structure the deal, and respect both parties involved in the dealmaking process, the piece in Advisor Perspectives says. FAs agree and assert before deciding to sell their practice, business owners must choose specifically why they want to sell their firm.

It's amazing how few RIA owners have thought about why they want to sell their practice, John Copeland, managing partner of Wealth Partners Capital Group, says.

Wealth Partners Capital provides customized transition solutions to retiring advisors and their clients, and is partnered with advice firms EP Wealth Advisors, Forbes Family Trust, and MAI Capital Management, which all advise on at least $4 billion. RIA owners considering selling must figure out why exactly they want to sell, he says. Do they want to ensure the best platform, provide the best opportunities for their employees, or receive the highest possible price?

After deciding to sell, finding the correct value for the practice is paramount and FAs must calculate practice value using a discounted cash flow (DCF) analysis.

DCF analysis helps both selling and buying parties understand the firm’s cost, top line revenue, and cash flow, Copeland says. DCF analysis also lets firms understand where their revenues come from. If income and cash flows come from retiring clients instead of younger, growing clients, it can make a significant difference in the business's worth, he says. But creating an effective valuation goes significantly further than using DCF analysis, according to Copeland. You can’t mechanize the process when creating business valuations. There are many factors that go into cash flow, including client demographics, and while all factors aid in creating a firm’s picture, the entire picture cannot be determined from the calculation alone, Copeland says.

Other highlighted factors include correctly structuring the deal and ensuring there is mutual respect between participating parties. Having a deal structure flexible enough to allow buyers to capture additional value within the deal is important, Copeland says. Using the correct deal structure, RIA buyers can ensure they receive fair value for a practice today, with contingent payments which allow for price adjustments based on future performance, he says. Selecting the correct deal structure allows for sellers to be compensated if the business was undervalued and performs beyond expectations.

Maintaining respect between a buyer and a seller throughout the sale process is also essential to guaranteeing the sale is completed successfully. When an owner sells their RIA practice, it is 100% personal and a massive undertaking, Fink says. Sellers must make sure they have an experienced buyer on the other side of the table that understands and respects their position, he says. Respect particularly comes into play when both parties are in the courtship stage of the sale.

There are more buyers than sellers of RIA practices in the market, so buyers must assume the seller has other options, Fink says in Advisor Perspectives. This means respecting the other party’s position is crucial for the deal to be successfully completed.