Take the Guess Work Out of Closing Your Deal Sarah Deasy & Ryan Grau

Transcription

1 Take the Guess Work Out of Closing Your Deal Sarah Deasy & Ryan Grau

2 AGENDA Elements of a Successful Deal Understanding the Market What Creates and Drives Value How to Measure Value 2

3 1. Valuation/understanding of purchase price 2. Financials strong on both sides of the deal 5 THINGS THAT NAIL A DEAL 3. Cultures are a good match 4. Create a roadmap for the new firm 1. Involve staff of both firms 2. Involve clients whenever possible 5. Seller Transition 3

4 What is the demand in the market today? MARKET STATUS A Seller s Market. For now o Sellers market for now o Interested buyers 40:1 o Qualified buyers 4:1 Buyers becoming more aware Where are industry values going? o o o Transactional value down Recurring revenue held steady Larger down payments are becoming more common More than half (52%) of Advisors are interested in acquisition but only 7% of advisors plan to retire in the next 4 years Across all channels Hybrid RIAs are the most likely to be actively or passively pursuing acquisitions 45% of advisors consider financing a moderate challenge and 39% consider it a major challenge 4

5 UNDERSTANDING THE MARKET WHO IS SELLING? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Internal External Attrition Book Job Practice Business Firm 5

6 SELLER S PRIORITIES CULTURE, CHARACTER, COMPETENCE Top 6 Factors that Sellers Consider Very Important When Evaluating Successors: 1. Likelihood to put clients best interests first 2. Regulatory/compliance record 3. Investment philosophy 4. Personality 5. Financial Planning philosophy 6. Operational capacity to assume additional clients Top Somewhat Important Factors: Revenue/AUM size, Geographic location, sales ability, fee structure 6

7 SUCCESSION CONFUSION SUCCESSION STRATEGIES FOR ADVISORS TRANSITIONING WITHIN 10 YEARS More than one-quarter (28%) of advisors who plan to retire within the next 10 years are unsure about their succession plan. It typically takes several years to identify and groom an internal successor. It usually takes at least months to find an external buyer, negotiate a deal, and execute the transition. 7

8 PREPARE FOR SUCCESS Staffing o Number, Skill Sets, Roles, EPLI (Employment Practices Liability Insurance) Workflow o Client Onboarding, Client Service Meeting, Client Requests Service Financial o Bottom Line Define your three C s o Culture o Character o Competence 8

9 UNDERSTANDING VALUE WHAT CREATES VALUE BUSINESS VALUE FUTURE BENEFIT STREAM 9

10 UNDERSTANDING VALUE WHAT IS BEING VALUED? GROSS REVENUE SELLER S DISCRETIONARY EARNINGS EBITDA CASH FLOWS 10

11 UNDERSTANDING VALUE APPROACHES FOR ESTIMATING VALUE ASSET APPROACH o o Book Valued Method Adjusted Net Asset Value Method INCOME APPROACH o Capitalization of Earnings / Cash Flow Method o Discounted Earnings / Cash Flow Method MARKET APPROACH o Guideline Public Company Method o Public Company Transaction Method o Comparable Private Transaction Method 11

12 UNDERSTANDING VALUE VALUE DRIVERS Drive Recurring Revenue Revenue Growth Client Growth High $ Clients Location Drag Poor Demographics High Concentration Risk High Expense Ratio Transition Risk Low Enterprise Strength Restricted Niche 12

13 PRICE VS. VALUATION WHO BEARS THE RISK? FULL PRICE - 20%-30% - 10%-20% + 5%-10% + 10%-20% All Cash 75% Cash Down Par 30% Cash Down 25% Cash Down No Cash Down

14 DEAL STRUCTURE PRIOR TO BANK FINANCING BUYER 30% buyer equity (cash) 3-5 year term for buyer SELLER 70% seller note, typically an earn out Seller has ongoing involvement and risk Buyer Risk Seller Risk

15 DEAL STRUCTURE WITH BANK FINANCING BUYER Up to 100% financing (down payment) 10 year term Discounted purchase price SELLER Seller monetizes value immediately Seller involvement reduced but still critical Buyer Risk Seller Risk

16 SMOOTH PRACTICE TRANSITION Typical attrition rates G2 buying a G1 1%-2% attrition Buying a practice within the same B/D or Custodian 2%-4% attrition Buying a practice from a different B/D or Custodian 4%-6% attrition 16

17 SMOOTH PRACTICE TRANSITION Important Considerations Plan the transition at the beginning of the negotiating process Develop and agree on key messages Be sure staff have and use the key messages Segment the book and design the transition using the segments See A and B clients, call C clients and mail D clients Start transitioning by practicing in meetings with the D clients rather than practice on A clients. Once you feel comfortable with the approach, then move to the A clients. 17

18 THANK YOU +