For retiring advisors unable to find an ideal successor for their business, selling the firm may become their only alternative. But finding a buyer is not always easy. And sellers should understand a few key characteristics that suitors look for in an acquisition.
Business is booming for baby boomer Howard Erman, and he is not looking to sell his expanding $150 million Seal Beach, Calif., business, Erman Retirement Advisory. But after decades in the industry and a stint as president of the Financial Planning Association, he understands the desire of some advisors to try and sell if they can't find a successor.
And he has some sage advice for these advisors.
“You would want somebody who is a professional; hopefully a CFP who values the profession and not just seeking to max it out,” he recommends, adding that the ideal buyer for retiring professionals would be a businessman with integrity, who cares about advancing the values of financial planning.
VLP Financial Advisors knows a thing or two about buying advisory firms. The Vienna, Va.-based firm, with an AUM of $350 million, has acquired six small practices since 1999.
Daniel Lash, a partner at VLP, says both buyer and seller must make concessions and compromise on price and service model.
The first thing Lash looks at when considering buying a firm is the average age of clients.
If the top 20 percent of clients “are all over 70, you know that they are not going to be a client a long, long time,” says Lash.
To figure out if the deal will be worthwhile, Lash suggests looking at the average revenue per client: “Essentially you want to make sure there’s a good range of clients in sense of younger people who are still accumulators.”
Lash is aware that there’s going to be some clients who are close to retirement but potential suitors don’t want all of their clients to be retirees taking money out of their portfolios.
“You know that is going to happen but you just don’t want your entire business to be doing that,” he says. “That doesn’t help from a revenue generation standpoint.”
Buyers are also curious about the structure of the firm. For example, is the firm a paperless office? What kind of services does the firm provide to clients, and what’s the fee structure?
Given Lash’s experience with acquiring firms, he says he will be well versed on what to do if and when he decides to sell.
It’s an advantage that serial acquirers have over firms that are now looking for an exit.
“Most sellers don’t have that experience,” says Lash. “They are going to do it once and they don’t want to do it wrong.”
Editor's note: This article has been republished from its original posting to make explicit that Howard Erman is not selling his business and that his comments were provided as advice for those advisors who are looking to sell.