Read before selling: The many alternatives to an M&A deal

With more private equity firms and other investors racing into wealth management to fuel the continuing M&A deal flow, many financial advisors face the choice of whether to sell their firm.

Offers to buy an independent registered investment advisory firm run at a healthy valuation upwards of 10 times their earnings before interest, taxes, depreciation and amortization, which helps explain why hundreds of owners are taking the deal each year. Advisors confronting a succession question ahead of their looming retirement, or trying to find greater scale or better service through outsourcing, can often add those factors to the "pro" side as well. 

However, the marketplace for advisory practice and RIA services provides other paths that can boost valuations while keeping the firm's equity with its founder and their preferred successors. 

Firms can accomplish a founder's goals without rolling up control of the company into a giant consolidator, experts told Financial Planning. The options include changes in brokerage, RIA, custodian, platform provider or technology vendor; capital facilitation between the current and next generations; increasingly available forms of financing; or selling a minority stake.

"We talk to advisors all the time about selling their practices, and — I have to be honest — in many of the cases, it's not the right decision," Matt Regan, the president of independent advisor platform Wealthcare, said in an interview. The incoming gains of selling right away "might not be the best thing for you or your family" from a tax perspective, he noted. And "the one thing they worry about the most is not money," but rather "what will happen to clients" under new ownership, Regan added. "I truly believe that's advisors' No. 1 concern."

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Consider the many options

About 180 advisors managing $7 billion in client assets have tapped Wealthcare for a wide range of services like technology, trading, compliance, planning, investments and other operational needs as independent contractors or W-2 employees of the firm, Regan noted. A growing number of RIA consolidators, platform providers, independent brokerages, custodian and clearing companies and fintech firms are competing to work with advisors on any basis whatsoever — whether that setup entails parting ways with majority ownership or not.

Advisory practice owners often feel a sense of "dissatisfaction" when there is a "discrepancy between what was promised in terms of support and services and what was received" through their current platforms, said Shauna Mace, the head of practice management for asset manager, custodian and technology firm SEI. 

In thinking about "what can we take control over, what can we give up," and a way to find capital without folding into a consolidator, the founders encounter a "successor problem," she added. "You want to grow, but if you grow too big then you price out your successor."

The array of vendors across the industry can help. For example, Dynasty Financial Partners could support a firm in launching a new RIA, joining an existing one in its network of 55 with more than 400 advisors managing $100 billion in client assets, or securing capital and M&A transactions, noted Dynasty Vice Chairman Andrew Marsh.

"I'd like to think that Dynasty's approach to meeting people for the first time is very much consultative," he said. "We first start by trying to figure out the best solution, knowing that we're lucky enough to be able to offer decent solutions all around."

The best reasons to wait on making any M&A deal relate to the answer to "what's your ideal outcome," Marsh added. "Every partner of every firm and every CEO should be conducting themselves with an idea of what their ideal outcome is." 

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Other capital solutions

For some practices, that could emerge from spinning off only a minority stake in the firm to an outside investor — a method used by RIAs as large as Creative Planning and other advisory teams of all sizes. 

The incoming capital delivers "an inherent arbitrage" from the difference in valuation to an RIA after its growth as a result of the infusion of resources, while "you maintain autonomy" and "you still own the majority of your practice," Regan noted. 

"You've de-risked the largest investment that you have, which is your firm," he said. "Advisors just have to be very eyes-wide-open to what either selling the entire firm or a minority stake really means."

Other means of "diversifying the risk" relate to ways that "make it more economical" for the second generation in a succession plan, such as leaving the firm to two younger advisors rather than one, Mace noted. Profit-sharing agreements that transfer equity over a longer span or a range of "financing programs that can provide essentially small business loans to advisors" from collaborating banks or internal institutions set up for that purpose by the service provider firms could obviate the underlying justification for selling or slow down the transition, she said.

"Just don't do it alone. There are so many resources and experts and advisors who have gone through this process," Mace said. Before selling, advisors should "let key partners know" by getting in touch with their custodian or other vendors, she said. "Talk to them, let them know what's going on, let them know, 'I got an offer, and I don't quite understand the terms.'"  

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Slow down

Advisors ought to think through their possible options ahead of time instead of "just being reactive" in a scenario in which "you and I are partners and we're having a great time running our business and out of the blue comes an offer," Marsh said.

An "internal next-gen buyout" facilitated by Dynasty or another provider presents an attractive alternative to rolling up the equity to someone else, and outsourcing some aspects of the firm's operations could avert an outright sale while ensuring the "business becomes very, very clean and therefore more attractive to a buyer" down the line, he said.

"The worst thing you can do is rush. The best piece of advice I can give is, have long-range planning and things in place that lead to a sale and consider other alternatives," Marsh said. "If you're thinking of selling, take your time and build yourself a longer-term plan."