Despite what you've heard, it's true. You really can sell your practice, even if it's a lifestyle boutique you run from a home office. But getting a price that actually will fund your retirement or provide for a spouse or heirs is an entirely different matter.
Just ask E.W. "Woody" Young, a Dallas advisor who spent 10 years building a highly profitable, high-end planning firm with partner Glenda Hempel before having his succession plan tested by a heart attack in 1997. No neophyte to the business world, Young was a veteran of IBM and his own business-consulting firm, so he thought the buy-sell agreement he had with Hempel was a sound one.
But as surprising as the quadruple-bypass surgery he underwent two days after his attack was, the glitches uncovered in his practice and the firm's succession plan during three months of rehab were even more shocking. "What we quickly discovered was we each were running our own companies within the firm," Young says. "My clients said things like, 'Yes, we know Glenda's your partner, but we've never met her.' We were hiring our own folks and creating independent systems and ways of practicing. It made even temporary transition much more difficult."
As advisors across the country wonder how prepared they are to retire and turn over their firms and clients to a new planner or entity, there is both good news and bad.
First, the good news: There is a burgeoning marketplace for all shapes and styles of planning firms, thanks in part to online merger and acquisition services such as FPtransitions in Portland, Ore., which served as a virtual matchmaker for 100 sales in the first 20 months of its operations.
"Our average seller gets 23 buyer inquiries in the first five days of their listing, and most are prequalified," says David Goad, CEO of Business Transitions, the owner of FPtransitions, an online exchange for planning-shop buyers and sellers. "Most of our inquiries come from the huge base of planning practitioners trying to grow their businesses incrementally through acquisition, as opposed to the slow process of trying to find new clients one at a time."
This acquisition of smaller firms, termed the planning industry's microconsolidation, is having more of an effect on the overall shape of the planning business than large-entity activity, Goad says.
What does the microconsolidation look like? About 50% of transactions involve outright sales to an outside practitioner or firm. "This is the most popular option because it allows for a true exit from the industry," Goad says. Most deals have earnouts-provisions that require sellers to continue working for a specified time-that account for 50% to 75% of their compensation, making their participation in succession and client transition crucial.
Sales to partners and internal planners account for 25% of planning firm M&A activity, Goad says. Rollups, or acquisitions by consolidators, banks, insurers and trust companies, total about 15% of firm transactions, with mergers between firms accounting for the remaining 10% of M&A activity.
Can smaller firms, especially one-person shops, really attract buyers? The skeptics need search no further than Albuquerque, N.M, where longtime planner David Drucker put his firm on the market with FPtransitions in March. He closed a sale within 90 days for a multiple of between two and three times the annual revenues generated by his fee-only practice, which managed $60 million in client assets.
Within the first week of listing his shop, Drucker had 30 suitors, 10 of whom he took seriously enough to meet. Although two trust companies would have made interesting buyers, Drucker sold to Sunset Financial Management Inc. in Boston.
"I was looking for someone who could get in front of my clients, earn their trust and take over the practice as quickly as possible," Drucker says. "That's why I chose Sunset. The firm's existing client base looks like mine. They practice very much like I do. And they won't have any challenges talking to clients in their sixties, seventies or eighties with a million to invest. You have to remember with a sale, you're getting some money up front, but if you can't transition your clients fairly quickly, you'll end up paying it back."
Drucker's situation is not only the envy of many in the industry, but it is highly instructional for any firm contemplating succession, especially planners who fly solo. Drucker, 53, is a sole advisor. After moving from Bethesda, Md., to Albuquerque in 1998, he created a "virtual" practice, retaining relationships with all but two of his Maryland clients. He used phone and e-mail to manage relationships. As a result, he was selling his practice-a book of business, if you will-not a physical shop that would have required a nearby buyer. He charged all clients retainer fees, which produced attractive reoccurring revenues for potential suitors. And he had a completely paperless and systematized practice, which was easily transferred.
"When potential buyers came out to check out my practice, I could click on a button for each client, and all correspondence and documents relating to that client, including estate, tax and trust documents, were right there. So essentially, from an operational perspective, buyers knew the transfer would be effortless."
Smooth transitions require owner involvement, and Drucker's deal was no different. He has explained the transaction to clients as a merger and is staying on to work with them for at least two years. Part of his compensation, his earnout, requires it. He's also compensated for referring new clients to the practice.
To maintain some planning income, he kept about 10% of his high-end clients who are local friends and people he knows socially.
Drucker's advice, beyond creating a virtual and paperless practice? "Hire the expertise you need." He hired his own financial advisor, Bob Maloney, of Annapolis, Md., who he says kept him from jumping at the first offer and insisted on a three-year earnout instead of the five-year one buyers were offering.
The open market can be a quick indicator of just how desirable your practice is. But since about 25% of firms are sold internally to partners or other planners, valuation can be more subjective. And that can play havoc with internal buy-sell agreements and funding mechanisms, such as insurance policies and earnouts.
Having seen firsthand during Young's recuperation from bypass surgery that succession could be a rocky road, Young and Hempel brought in valuation consultant Mark Tibergien, of Moss Adams in Seattle, to find out what they were doing wrong. "We wanted to know if our buy-sell agreement was fair to both partners. And whether it was fair to our families and employees and clients," Young says. The result? "We found out we were worth about half what we thought because of the way we were practicing, as businesses within a business."
Since that time, Young and Hempel have worked to create a single firm-Qwest Capital Management-that is bigger and more efficient than any one planner. The upshot is that the firm's team-based approach to planning doubled its valuation in just three years and created revenues that are increasing at a breakneck pace-up an astonishing 40% in 2000. That created $3.3 million in gross revenues for the firm in 2000. The valuation and consulting services cost $10,000, and a shareholder agreement that gives two other planners the right to buy in (they're arranging the financing now) cost another $5,000. Young calls the money well-spent.
The 32-person shop currently has $750 million under management and much improved scalability, allowing it to add 60 clients this year without adding staff.
The partners are convinced that kind of legacy creates a marketing advantage. "Let me put it this way," Young says. "If a client from a firm without a real succession plan comes in, we'll make the planner look like a fool. We'll say 'Mr. or Mrs. Client, you should be able to have a life-long relationship with a planning firm. There's no finish line.'"
Is succession planning a competitive marketing advantage? The answer is yes, and that underscores the need for planners to begin to think of their own succession plans in terms of what they'll tell new and existing clients who begin to worry about what happens to them if their planner can't practice.
Glenn Kautt, a planner who is no stranger to M&A activity himself, says he couldn't agree more. To ensure successful succession for his practice, Kautt has a certified valuation and a buy-sell agreement in place, albeit with another planning firm. He's also created a systematized and transferable practice that operates without his having to practice day-to-day.
The merger of three concerns created his firm, The Monitor Group in Fairfax, Va., a 10-person, fee-only practice with $175 million under management and a thoroughly institutionalized team-based approach to planning. The firm took the name of its most prominent acquisition. Previously, The Monitor Group was owned by high-profile advisor and retirement-planning-software pioneer Lynn Hopewell.
"I'm not waving my flag to be acquired, but I expect my buy-sell agreement to evolve in the next five years," Kautt says. "If you have a static buy-sell agreement, you have a static practice. It may end up that I don't need an outside agreement if we continue to groom in-house people for succession. Right now, we're structured to double or triple our client base without having to add staff, so that could work."
Kautt declined to name the buyer in his agreement. But he said he actively sought a potential acquirer located close to his firm to ensure that his business was a going concern that would pay him to retire or his family in the event of emergency, while continuing to provide service to his clients.
"Firms that don't have some type of plan in place put their clients at risk," Kautt says.
One alternative to going it alone is to find like practitioners in your area to-in effect-date, he adds. If it works, you can merge operations and share costs. Or, you can go one step further and create a larger team-based firm that adds value for succession or M&A purposes. In either event, you can at least serve as each other's transition partners, meet each other's clients and ensure you'll both have backup if something happens to the other planner.
"Don't wait until you have a heart attack to do some planning," Young says. "Find a like-minded planner and at least get a yellow-pad agreement in place. Combine marketing events. Sit in on each other's client meetings. It will give your family and clients peace of mind," he adds.
There's no time like the present. Mergers and outright sales are expected to lead planning firm M&A activity over the next few years, but even these types of transactions are eventual exit strategies usually predicated on two or more years of seller participation in the transfer of the business. If you wait until you have to retire, a smooth and profitable transition won't be an option for you, your family or your clients.