PLANADVISER - November/December 2021 - 33

future, DeVoe says. " The one thing I'd say, " he adds, " is that
the longer you wait to put together a succession plan, the
lower the degree of likelihood that it will come to fruition. "
* Decide on your goals upfront. " I think the right place to
start is thinking through your goals and objectives, " DeVoe
says. " What do you hope to achieve? What are your economic
goals and objectives for your business? What are your goals
and objectives for your own, ongoing role? And what are your
goals and objectives for your team's ongoing roles? "
* Identify one or more potential successors. It is important
to do an honest assessment of the advisory team,
DeVoe says. " Do you have an internal successor already
in-house, someone who can be coached to manage a range
of day-to-day operations and also be a leader of the organization?
And, if you do have that person, or more than one
person, can they afford to buy your organization? "
The ability of an internal successor to buy an advisory
business is becoming an acute issue, DeVoe says. " The good
news is that many of these firms are growing and doing
very well, " he says. " The bad news is that, often, the value
of these firms now exceeds the grasp of G2[-the secondgeneration
owner who would acquire the firm]. So in many
cases, you won't be able to do an internal deal without
selling at a discount. "
* Decide on the right equity timing. " The idea of pathways
to partnership, and allowing folks a designated way
to earn equity in the business, has become something that
more and more top firms have been looking at, " Leung says.
" Equity has become very valuable currency, and it incents
everybody to be on the same page and work for the overall
success of the organization. More firms realize now that
having metrics and a pathway to equity can be a really
smart way to retain their best people. "
Nash is not a proponent of allowing potential successors
to start getting equity right from the start, unless they
bring their own book of clients and assets to the equation.
Instead, he thinks it works better to offer a salary and
bonus structure initially, then add an ability to buy in on
the firm's equity in the future.
The senior adviser may end up
deciding to do an external sale,
and if a junior adviser already
has been given a 30% ownership
stake,
for example,
that
could complicate a deal for
both advisers and the potential
acquirer.
" Over time, you can let that
junior adviser start to buy in, and
you can do that at a discounted
valuation if you want, " Nash
says. " If you end up selling externally, the junior person
[with an equity stake] ends up making money also and can
continue working there with the salary and bonus structure.
That way, it's strategic, not just, 'You automatically
get equity.' "
* Be OK with a valuation discount. " The economics of
an internal sale are different, compared with an external
sale, " DeVoe says. " Typically, if you are selling internally,
you're either selling a minority stake or selling a majority
stake at a discount, and you're discounting the value of the
firm for emotional or personal reasons [such as selling to a
family member]. If you sell externally, the valuation can be
nearly twice as much, in today's environment. "
" The marketplace is so hot, and prices are so high, that
the gap between what the owner would get in the marketplace
and what the owner would get in an internal succession
is huge, " Darian points out. " So you might get $20
million on the open market, or do
a $10 million succession plan. "
The External Sale Option
For an adviser thinking about
succession planning, it is also
important
to consider
the pros
and cons of an external sale. " Part
of it is going to be, what's the goal
of the seller? " Darian says. " Some
advisers don't have someone
internally to sell the business to,
so they do an external sale. Some
feel the need for a growth engine for their business, and
they need help to grow because they now have to compete
with larger firms that have more capabilities. Some
advisers say, 'We can't survive and thrive as an independent,
so we need to sell.' And the option to sell externally
is so hard to ignore, when you look at where the [M&A]
marketplace is right now. "
Strategic buyers acquiring advisory practices used to
pay in the range of four to six times annual EBITDA-i.e.,
earnings before interest, taxes, depreciation and amortization-or
two to two-and-a-half times a fee-based practice's
annual revenues, Nash says. " Those multiples have
increased. Where we were seeing deals at four to six
times EBITDA, now it's five to seven or five to eight, " he
says. " Where we were seeing two to two-and-a-half times
revenue, it's now two to three times revenue-and higher
for the better businesses. Most buyers will be using the
EBITDA multiple for their calculations. "
An external sale does have some potential challenges.
" One is that the process can be somewhat arduous to go
through, " Holly says. " It's never fun to integrate a business,
but it's necessary work. It's important to go into it realizing
that it's going to be work. You may be learning new systems
and processes, and it's important to set aside enough time
for that. "
The adviser also needs to keep in mind the amount
of time it will take to help clients make the transition
smoothly, Holly says. " It's all about reducing friction. Friction
comes from transitioning clients and having new
service agreements with them, and there could be differences
in the services or the fees, " he says. " The largest
friction for an adviser doing an integration initially comes
from having those conversations with clients. " -Judy Ward
planadviser.com November-December 2021 | 33
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