Convincing investors that Focus deserves a reasonably high multiple will also be pivotal. When Financial Engines and Edelman merged and went private, the private equity investors paid 19 times traditional EBITDA. But Financial Engines is the nation’s first robo-advisor, with a huge footprint in the 401(k) market. Like Edelman, it specializes in serving middle-class America, a market considered attractive because most of the financial advice industry has shunned it.

Focus’s revenue grew 36.6 percent in 2017. However, regardless of what metric one assigns to organic growth, most of the topline gain comes from acquisitions. To keep these transactions coming requires continuous financing and as Focus gets bigger, it will need to do more acquisitions every year to sustain its growth rate .

That brings up the issue of Focus’s capital structure, which includes $1.1 billion in debt and $680 in convertible preferred shares. If the market buys into Focus’s adjusted EBITDA concept and gives the aggregator a multiple of 15, that translates into an equity valuation of about $2.175 billion. Were that to happen, the IPO would be a success.

But if investors want to rely on the traditional EBITDA metric and assign a 15 multiple to $95 million, the equity turns out to be $1.425 billion, enough to cover the debt but not the convertible preferred. It’s not clear whether Focus and its underwriters, Goldman Sachs  and KKR, would pull the IPO or resort to creative financial engineering maneuvers if that happened. KKR also happens to be one of Focus’s two major private equity shareholders.

Where Are Advisors’ Yachts?

KKR and Stone Point, another private equity firm, own 70 percent of Focus with the rest divvied up among management and advisors. Most advisors will receive restricted class B shares that they can swap into saleable Class A shares over a three-year period at the rate of one-twelfth per quarter. Thus if the stock pops in the months immediately after the IPO, advisors will be limited in their ability to get liquidity.

The Long Term

The S-1 filing says Focus has 55 partner firms so, depending on which EBITDA metric one uses, the average firm is throwing off between $2 million and $3 million annually. They represent major small businesses for three to five private advisor/owners but look puny to Wall Street.

When ownership and cash flows are divided with an aggregator like Focus, they look even smaller. How Wall Street looks upon this type of business model remains to be seen.

However, as mentioned previously, analysts who have examined Focus’s results believe it displays many of the traits of an aging advisor network with an even older client base. Other aggregators have been established to help finance the ownership transition of RIA firms from their founding partners to the next generation.

All the aggregators are talking about the importance of achieving scale. It would appear Focus is already trying to consolidate the firms within its own network. The S-1 mentions that Focus currently has 55 partner firms and also lists more than 95 acquisitions during its history.