The final issue of the session was whether a seller should take cash or equity as compensation. Taking cash removes concentration risk and diversifies an advisor, often at a time in their lives when they are approaching retirement, Tibergien said.
Seivert countered that taking equity in a larger, more diversified concern could lead to far greater wealth. There’s a reason why private equity firms are piling into the RIA space. They like the client retention rates, high profit margins and predictable cash flows in a world where the demand for financial advice outstrips the supply of advisors.
Asset-based pricing doesn’t guarantee a higher valuation, Tibergien said in an interview after the session. “Value is a function of the future,” he continued. “While you can always find a ‘greater fool,’ buyers are becoming more sophisticated with every deal they do.”
Advisors and others love to talk about multiples for both public and private companies, but the terms of any transaction are often the critical component. Two parties can often agree on price, but how it gets paid and when is what sellers need to understand, Tibergien noted.
Sometimes it’s the terms that cause deals to collapse. If a substantial portion of the payment comes in the form of a multiyear earn-out, the buyer transfers much of the risk to the seller. And that’s often where the real economic value lies.
Evan Simonoff is editor-in chief and editorial director at Financial Advisor magazine.