Internal Transitions
Even if the firm's founders don't want to give up ownership control of their business, they need to spread the equity among key personnel if the firm is to create any sustainable business value. Legal ownership simply doesn't convert into economic ownership even if a control-driven founder might wish it did.
"A buyer isn't buying you [the founder]," Hurley says. "He is buying your successors' services."
While internal transitions are sometimes characterized by pricing disputes and cultural issues, a transition plan allows a firm flexibility, stability for clients and a way to retain key employees. If the other financial metrics were equal, a firm with widely dispersed ownership would have significantly greater value than one with highly concentrated equity.
But a major problem is finding a price that is fair to the founders and doesn't saddle the next generation with decades of debt repayment. Even if everyone can agree on a price, the next challenge is financing the transition. Since many banks don't make such loans, internal transactions "require cross-guarantees from the selling owners and the company."
Selling To Another Wealth Manager
As Hurley states at the start, most fee-based and fee-only firms have little enterprise value by themselves. When several of them merge, they can build an organization with scale and have the capacity to grow at a faster rate.
Furthermore, selling to another advisory entails continuity and certainty for clients, as well as opportunities for successors. The structure of a deal depends on the goals of both the seller and the acquirer. Is the goal to knock out a lot of overhead and increase profits? Or is it to increase capacity to accelerate the top line?
One reason why there have been relatively few of these deals is that potential sellers enter negotiations with unrealistic expectations. Hurley calls them "borderline delusional," not only about price but about the post-closing management of the business. "Reasonable buyers will at least try to be accommodating, but there is a limit to their patience," the report states.
Sellers who demand high salaries after the closing can expect a lower price up front. They also need to understand that a buyer's capacity to pay is a form of counterparty risk, and depends on the buyer's financial strength and access to capital.
Hurley concludes his report by noting the irony that many advisors are devotees of the Fama-French efficient market hypothesis and yet are convinced the theory doesn't pertain to the market for advisory practices. The evidence is they are wrong.