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in one unified practice. By having one brand name and many
centralized operations, we gain efficiencies, " Shoff says. " It
allows us to truly build scale. Some of our competitors that
are acquiring retirement firms are really just a mash-up of
$1 million to $3 million [in revenue] practices. The idea that
you can buy a couple of firms and bolt them together with
marketing and not integrate the operations and infrastructure-we
think that's going to be a failed strategy. "
An advisory firm team that is considering selling should
think in depth about how much control it wants to keep once
the deal closes, DeVoe suggests. " The degree of control they
kept used to be extremely important to advisers making
a deal. Most wanted to keep making all of the decisions.
But in today's environment [with intense competition and
compressed fees], many have decided they're willing to give
up some control in return for getting scale, " he says.
adviser, an RIA lacking noncompete agreements with key
staff in case they depart the firm, and an RIA very concentrated
in a particular client segment.
Acquirers considering a deal also take a close look at a
potential acquisition's financial performance, and the key
factors CAPTRUST considers include total revenues and revenues
per client, Shoff says. " We're generally interested only
in acquiring retirement-focused practices that have at least
$1 million of [total] revenue per year, but, ideally, we want
firms north of $3 million in annual revenue. " CAPTRUST also
considers an advisory practice's revenue per employee. " If
you look at healthy, retirement-focused RIAs, their annual
revenue per employee should be over $300,000, " he observes.
In addition, how a practice spends money affects its
THE AFFILIATION OPTION
CHOOSING to affiliate with an aggregator instead of being
acquired still can make sense for an advisory practice, sources say.
" If you lean toward affiliating, it's because you want to stay
independent. And I believe there's still much room for the affiliation
model, particularly for firms with under $200 million in assets
under management [AUM], " Advice Dynamics Partners' David Selig
says. " They can get branding, technology and [back-office] support
from the aggregator.
" You get to almost 'rent' services, " Selig says of the affiliation
model. " There are thousands of small practices for whom affiliating
might make sense: They can hitch their wagon to the aggregator's
star and take advantage of the scale the aggregator has built. "
" It can be a way to get 'synthetic scale,' and that can be an intelligent
decision, " says David DeVoe of DeVoe & Co. " You determine
the things you're really good at-your core competencies-and
then it can make sense to pay a fee to [an aggregator] with different,
operational core competencies. " -JW
Valuation Drivers
A quick, starting approach to an advisory practice valuation is
to use a multiple of five times the practice's annual EBITDA-
i.e., earnings before interest, taxes, depreciation and amortization-or
two times the practice's revenue. So a practice
with EBITDA of $2 million could be worth in the ballpark of
$10 million in a sale. Bruno says an in-depth valuation typically
takes one week to one month, and the actual multiple
ultimately used for the acquisition of a practice varies based
on factors such as its size and growth pattern.
DeVoe sees three main drivers of current valuations:
the RIA's growth, its profitability and its risk level. Risks
can be multifaceted: DeVoe & Co. has 48 risk factors that it
looks at when it does a valuation. Risks that could reduce
a valuation include a business heavily dependent on one
valuation. " Acquirers are looking to buy profitable businesses,
but they're also looking to buy businesses that are
investing in their growth, " says Bruno. " That
means investing in the people and technology
needed for growth, and paying their people
well and providing them with good incentives.
Firms that are growing because of the strategic
investments they've made in the business are
very attractive to acquirers. "
With the goal of maximizing their EBITDAbased
multiple, some advisers take cost-cutting
too far. " Many times, you have an adviser
who knows he wants to sell the practice soon
and tries to pretty up the EBITDA by cutting
expenses, " Sokolic says. But potential acquirers
such as Hub look very closely at a practice's
expenses, he says, and will realize when a firm
has artificially low staffing costs and will need
to hire more people soon.
An advisory practice's growth patterns
also play a major role in its valuation. " A big
part of what buyers look for is synergy, " Bruno
says. " If a firm being acquired specializes in
retirement plan advice, that can mean also
demonstrating the ability-and the potential
for an acquirer-to leverage those relationships
with plan sponsors and participants to
connect to new wealth management clients. "
An advisory practice with a track record of being able to
do that would get a premium on the valuation, and wealth
management advisory services also typically have higher
profit margins, he says.
While a potential acquirer will look closely at how much
new growth opportunity an advisory practice could offer,
Hub's Owen says an adviser considering being acquired
should do the same. " One thing I'd look at with a potential
acquirer is, geographically, does it have a large base of
existing clients in my target geographic area that it could
refer to me? " he says. " For an adviser, it's also important to
ask yourself, what is the size of the typical client that the
acquiring firm has? Some acquirers may have many clients,
but these clients mostly have very small retirement plans
that are not a good target for the adviser. " -Judy Ward
planadviser.com November-December 2020 | 17
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