Emotional attachment to the business an advisor founds is often the reason he or she can’t sell it, according to a new white paper released by Allworth Financial and DeVoe & Company.
Using charts and data sourced from DeVoe & Company’s research, including the M&A Outlook and Talent Management Surveys, the two companies surveyed senior executives, principals, or owners of registered independent advisors (RIAs) ranging from $100 million to over $10 billion in assets under management (AUM). The study found that the selling process itself can create a cycle of emotions that, if not managed, can stall or derail what would otherwise be a strong partnership.
DeVoe said in the white paper that the industry has a significant succession planning problem because many practice founders cannot find someone internally who can afford to buy out the business or is ready to assume the reins of command. Even when the RIA owner would like to sell to a son or daughter, it is increasingly not an option, DeVoe found.
One of the study’s respondents, the founder of a mid-sized Midwestern RIA firm, had initially planned to sell the business to his son when he retired. As the firm grew, however, the valuation of it steadily increased to a point where the cost to buy it exceeded the son’s financial resources. Both father and son agreed that the best decision was to sell externally to another Midwest RIA. However, that alternative is often fraught with emotional landmines that can just as easily blow up an M&A deal that would have been beneficial to both parties, DeVoe said.
While client care is top of mind, with 22% of respondents citing it as a top concern and 42% selecting it as a top motivator to sell, nearly a quarter (23%) of RIA owners said they were concerned with selling to the wrong buyer. Smaller firms managing less than $1 billion in AUM were even more concerned about losing control of their business (39%) compared with firms managing $1 billion or more of AUM (30%). However, nearly three-quarters of all respondents (72%), no matter how large or how modest the amount of client assets managed, said they wanted to remain in some sort of leadership or senior advisor role for several years or longer after transacting the sale of their business.
DeVoe found that fear of losing autonomy plays out in four possible scenarios: 1.) owners are concerned that once the business is sold, they may have to work different hours, deal with red tape, and follow different processes; 2.) owners fear becoming an employee and having to report to someone above them who has final say over running the business the owner founded; 3.) owners fear how change might harm clients, staff or the firm overall; and 4.) owners become anxious, and that anxiety leads to seller’s remorse - which DeVoe said is really a combination of all the fears, and one that is usually misplaced as the transition pieces fall into place.
David DeVoe, founder and CEO of DeVoe & Company, said in a news release that if RIA owners can learn to separate their fear of the unknown, selling their business is more likely to be less stressful and more successful.
“Selling your firm is likely the most important business decision of your career, but it is also a profound personal decision,” DeVoe said in the news release. “All sellers will experience an emotional rollercoaster through the process. Anticipating the strong emotions that will emerge will optimize the likelihood this important transaction gets completed, and the new partnership starts on the right foot.”
Allworth Senior Partner and Co-Founder Pat McClain also weighed in on the study’s findings.
“We see it all the time, principals work to build something they can be proud of, then it comes time to think about what’s next,” McClain said in the news release. “You pour your heart and soul into nurturing something, then it comes time to sell, and you’re faced with feelings you couldn’t have anticipated. Our hope is that this paper will facilitate not only a deeper understanding of the experiences of other principals who have gone through a deal, but help guide them as they make important decisions about the future.”
Founded in 1993 in Sacramento, Calif., Allworth Financial is a registered investment advisor overseeing approximately $15 billion in assets under advisement (AUA) nationwide.
Headquartered in San Francisco, DeVoe & Company was founded in 2011 to provide consulting services to the wealth management and financial advice industry, with a focus on M&A guidance and valuation analysis.