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Transition series: 1 | Selling your practice

What are the necessary steps for selling an advisory practice? Listen to our Q&A session with SEI’s Gabe Garcia and FP Transitions’ Scott Leak to learn how to start planning today.

This is the first of a four-part blog series focused on helping to navigate a business transition. In the series, we’ll provide you with advice if you’re considering:

  1. Selling your advisory practice
  2. Going fully-independent RIA
  3. Navigating your succession
  4. Buying and merging your advisory practice

In this “Ideas from the Lab” blog post, we’re focused on selling your practice. We partnered with FP Transitions’ Senior Business Transition Consultant, Scott Leak to provide answers to the important questions you may have when considering—or working through—the sale of your business.  

The key takeaway: Don’t wait to start planning the sale of your business. The first step is easy—get a firm valuation from a third party such as SEI’s strategic partner, FP Transitions. A valuation will help you not only understand your firm’s value, but also provide insight into how you can enhance your enterprise value over time.

Listen to the Q&A session between SEI’s Gabe Garcia and Scott Leak below or jump to the relevant parts of their conversation using the timestamps below.  


“Our data shows that for each decade an advisor lives, in their forties, fifties, sixties, and seventies, that their growth rate goes down exponentially … waiting to sell isn’t necessarily the best thing.”

Scott Leak
Senior Business Transition Consultant at FP Transitions

Listen to the full expert Q&A session

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Hello everyone, I'm Gabe Garcia, Head of RIA Experience at SEI, and I'm joined today by Scott Leak, Senior Consultant at FP Transitions. FP Transitions provides valuation and consulting services for advisory firms looking to evolve their businesses through mergers and acquisitions, succession, or other business transitions. Today's conversation we're gonna touch on four key considerations when considering selling an advisory practice, how to prepare for a sale, how to source and vet buyers, negotiating the transaction, and closing the sale. So, Scott, we'll jump right in with the first question here. For those who are interested in potentially selling their business, what should they be doing before they go to market and engage with a potential buyer?

- Thanks, Gabe. I think, you know, preparing yourself and your business for the selling process is kind of an obvious, but step one in there. You wanna identify and evaluate your preferences and your expectations of the sale as well. You wanna consider the realities of your journey, like how much time are you gonna have to invest in this process and the resources you're gonna need to do it. You wanna make sure that you're securing confidentiality. You'll probably hear me say multiple times today, make sure you get an NDA signed before you talk to any potential buyers. You want an accurate valuation of your business. You wanna make sure that when you're ready to ink a deal you have proper documentation ready to go and implemented, and have a rigorous due diligence process. So doing these things is gonna help avoid some surprises during the buyer selection process, and you might want to as well consider employing a third party to help you find the right path and be an intermediary and guide you along the way.

- So when or even why should someone be thinking about starting the process to sell their business?

- Well, unfortunately too many advisors end their businesses simply through closing their doors and there's client attrition. And this is usually a really valuable asset, and this is why we're seeing so many banks and PE firms wanting to get into the space, because this is a really good industry to be in, and these are very valuable businesses. So certainly just recognize the value of what you've built over your career and know that you can monetize this. So that's certainly the why behind it. The when aspect of it, I kind of like to think of this maybe the same way advisors think about it with their clients, like, this is kind of your retirement plan, if you will. So think about that end game strategy. This isn't an exact science, there's no perfect formula or answer, but you know, if you were to treat it like a house or a significant stock holding, selling on the way up makes the most sense. So, the trajectory's kind of hard to judge, except for in hindsight, but pick a time that seems right for you based on your age, your level of energy and enthusiasm, the time of year and the time of life. There's some general guidelines that past sellers have used and found helpful. One of them being thinking about a workweek trajectory. And we kinda have what we call the 30 hour threshold. So start thinking about three to five years before you're going to maybe whittle your time down to maybe work 30 hours a week, and at that point in time is probably the right time to get something in place. Because if you are the sole owner and you're working less and less, eventually your employees, if you have them, are gonna maybe have a little mutiny for you to deal with if they're doing all the work and you're bringing in all the money.

- Yeah, when we talk with clients, you know, sometimes the headlines capture the attention of valuations, and is this the right time, and top ticking the market because there's, you know, an influx of capital in the acquisition side of the table. We tell folks, take a step back and ask yourselves these three questions, right? What do you want for your business, right? What do you want for yourself professionally? Do you wanna work less, more work-life balance? Do you want to have different responsibilities? Do you want to have additional resources? Do you want to serve a broader segment of the client base? How do you create career pathing for your team? And then at the end of it, you know, personally, what do you want for yourself? To begin to frame the process, 'cause the dollars will always be there,

- Absolutely. - but what is the outcome and what are the other equally, if not more important, aspects than just the capital that you might receive from a transaction. - That's spot on. - Speaking of dollars and values, and valuations of firms, you know, getting a valuation obviously is an important step. If a potential seller has time, how can they maximize the enterprise value of their business to capture as much, you know capital as they can? - Really good question, and certainly another reason why you start thinking about this maybe three to five years before you actually are ready to sell. So one of the things you can do, I mean, if you're getting evaluation done at a company like FP Transitions, we can also provide benchmarking along with it. So we'll provide maybe 50 different key performance indicators to look at, benchmark you against the peer group, and we can identify what are maybe the three or four things that are gonna give you the most lift if we were to improve those over the next 12 to 24 months, how is that gonna maybe boost that value? Another thing is to look at, we have a simple kind of rule of thirds, so you wanna make sure that about a third of your revenue is going towards owner and professional compensation, about one third going to all other overhead, staff, occupancy, technology, marketing, etcetera. And that should leave about one third for profits. And so if you do that, you're gonna be a more desirable practice to be acquired, and that's gonna help boost that value as well. I wouldn't say focus too much on things like technology, and building scale, and building up an enterprise, because in an external sale, most of the time what you're really just selling is goodwill. We're not selling widgets, we're not selling manufacturing equipment, you're not gonna sell the assets of the company in most cases, it's just the client goodwill. So don't spend too much time building up technology. I'd rather see people continue to outsource it as best they can and just boost the revenue. - Wonderful. So you've taken some time to do some reflection and prepare. Let's talk about sourcing and vetting the right fit buyer. Certainly there's no lack of interested parties in the market would be happy to have a conversation about potentially acquiring someone's firm today. How do sellers think about sourcing the right fit kind of buyer knowing that there are numerous different types of buyers in the market today?

- Yeah, to your point, finding an interested buyer is not hard, finding a qualified buyer, that's more of the challenge. So, you've gotta have some elevated and specific qualifications that must be met by a buyer in order to achieve the goals you got for satisfying your client base, and your staff, as well as yourself. So realizing fair market value is really gonna require a motivated and capable partner. So a commonplace for a lot of sellers to look, you want to consider the buyer's investment philosophy, their regulatory structure ideal, you usually want that to be matched up. So RAAs typically don't want to get acquired by someone who's at Ameriprise, for example. You know the enterprise strength of the organization of the buyer is certainly something that's gonna be important for a seller. Their experience, their education, their credentials, their level of technology. So those types of things that are going to make it so that firm can come in and integrate all of your clients and have a smooth transition is really important for a seller to look at. - So when we think about vetting and diligence, certainly on the buyer side in many cases, they have experienced, they've done multiple transactions, so they know what they're looking for in that vetting and diligence. But sometimes it's lost on folks that from the seller side, there should be, you know, some vetting, and discovery, and diligence as well. What does that look like from a seller's perspective versus the buyer?

- Yeah, this is such a great question, Gabe. I think a lot of people overlook the fact that sellers need to do just as much due diligence as the buyer does. Again, I said this earlier and I'll say it again, get an NDA a signed before you talk to a buyer, before you start sharing any confidential or sensitive client information, get them to sign that NDA. That buyer's probably got a lot of public information you can find out about them, particularly if they've done other deals, if there've been press releases about it, look into those details, go to the regulatory websites, go to BrokerCheck, go to review their ADV, read up on their website and just understand what they're presenting to the marketplace and their clients, and the services they offer, and the client experience that they're presenting. If they've got some lending in place, you want to see some type of evidence of pre-approval of that and any other evidence you want to gather that they can buy you. I don't think it's outside the realm of possibility to, say, run a credit report on your potential buyer, review their tax returns. If you're gonna stay and have employees join you as well, you wanna look at their employment agreement, their compensation, are they offering equity pathways for you and your employees. So there's actually a lot of things sellers need to be looking at too in their vetting process.

- Yeah. For a seller, what should they expect the buyer to ask of them from a diligence perspective? What are some of the top things that they wanna make sure they have their house in order to be prepared to share the data, the information, the history of the organization, again, to position them themselves as positively as possible and also maximize value?

- Yeah, so a lot of those same things I mentioned, it is gonna be kind of bidirectional for those types of due diligence engagements. You're gonna probably need to provide maybe three years of tax returns, you're gonna need to provide P&L, they might wanna look at, you know, QuickBooks, they might wanna look at reports from, you know, some of your technology providers, your custodian just to validate, you know, the fees and the revenue that have been charged. You wanna provide evidence that, you know, your stated earnings are actually real earnings. If you've got some little skeletons in the closet, like you've been putting some cars, and vacations, and things under the business instead of personal, not to say that those are wrong, but you need to own up to those and show those things as well, and be transparent about them. So there's a lot of things buyers are gonna ask for, and just know that, depending on the level of sophistication of your buyer, that the vetting process can take a while and you need to be patient and understand that this is a massive investment for that buyer.

- So let's talk a little bit about negotiating. What have you seen as a successful approach with respect to mindset to achieve a win-win between the seller and the buyer in the negotiation process? - Well, I certainly recommend getting the support of an independent professional, and particularly, and I'm saying this a little tongue in cheek, but you know, we present ourselves as non-advocates, and I think that's a really unique thing in the marketplace. A lot of times when buyers and sellers get together they might each bring their own attorneys to the table and it ends up being more like a divorce hearing than it is a marriage counseling session. And so that's really the way to think about it, because local attorneys that you might be using, they're gonna lack the knowledge and the complexities of the highly regulated industry that we're in, and they're not necessarily motivated by a win-win. You know, an attorney is a fiduciary for you alone and they're trying to get you a win. What they're failing to realize though is that even if you're not doing a sell and stay, which if you are, you definitely have to keep working with this buyer for a long time. But even if you're doing a sell and walk away, you're gonna have that one year consulting agreement where you're gonna stay on help transition the clients. And if you just went nine rounds with each other, you're not gonna be all that motivated to keep working together, but you need to to have your client retention numbers be good. So try to find a way to make this be as amicable and peaceful as possible. And so bringing in a non-advocate that isn't working for necessarily one side or the other, but is just trying to help get the deal done is one of the best ways to achieve a win-win for buyer and seller.

- So we've all heard the old adage, you know, I'll let you set the price if I can set the terms. So talk a little bit about what sellers should expect from a structure perspective when negotiating a transaction? - So there's gonna be a down payment, you can expect probably around to 40-50% down payment. You could expect as low as 20 or as high as 80, it really does vary. And it's helpful to get multiple LOIs. A lot of advisors might just find someone down the street or someone they've known for a while, and they're just considering one buyer. I've got a saying, one buyer is no buyer, so consider multiple buyers and get multiple LOIs. And you're really gonna have to compare all the different nuances, because there's so many possible deal terms, there's so many different points of negotiation. One of the big ones that is often overlooked is the tax implications. And so an advisor can negotiate how much of the transaction is allocated to goodwill, versus how much is to restrictive covenants, or that engagement agreement, or consulting agreement. So if you want to bring in a tax advisor or M&A experts, that's gonna help you with all of those different components, but you can have a lot of this transaction allocated to long-term capital gains, but understand that on the flip side, that's gonna be a much different writedown for the buyer than if it was allocated to you as ordinary income. So lot of different things to consider in that negotiation process and in those deal terms.

- Yeah. What I hear in that is bringing professionals, consultants such as yourself into the conversation, and I say that jokingly, but also very seriously, is important, because there are a lot of nuances, there are various different structures, there's critical components, such as taxes, that need to be addressed, and the negotiation of restrictive covenants is a critical component as well. And certainly, I've seen transactions done without and I've seen them done with, and I find that the process goes much easier and to a better fruitful conclusion when you have the right partners and third parties engaged in that process. So that's a good takeaway. - Yeah. - So let's talk about closing.

- Yeah. - You know, how do you get to a successful outcome and what potentially gets in the way? - A lot of things can go wrong and get in the way, and usually it comes down to the seller maybe getting cold feet. We close a very, very high percentage of the deals that we work on, and that's probably the number one thing that prevents the deal from getting done. So it doesn't even necessarily have to do with deal terms, it usually has to do with just this emotional aspect of I'm letting go of this business I've built, I'm letting go of my identity, that's something that's really difficult for a lot of advisors to deal with, and they just think, I'll hold on and just work a little bit longer. Unfortunately, what happens in a lot of cases is as advisors get older, our data shows that for each decade an advisor lives in their 40s, 50s, 60s, 70s, their growth rates slow almost exponentially as they get older. And so you get to a point where your value can actually decrease, and sometimes waiting for the last minute to sell isn't necessarily the best thing. So to get to a successful close, again, bring in an independent third party that's gonna help, someone that's gonna keep everyone on track, offer different solutions, be that go-between that can help both sides realize, like why their opinion is or is not valid based on data, based on comps. We do over a hundred M&A transactions a year, and so we can really help both sides be like, yeah, maybe you need to come down a little bit over here or maybe you need to come up a little bit over here. And that's a lot better way to get a deal done than those two attorneys on each side that are just trying to fight for their person to win.

- So how about the team? If you're a seller and you're negotiating a transaction and coming up on close, at what point in this journey do you bring the team into the loop?

- I would say not until you know their jobs are secure. They're going to potentially be very concerned about this. If they didn't know this was coming in the first place, this could be really jarring. So you wanna make sure that you've got pretty much the terms finalized. For some employees, you know, you might have a really good sense of whether they're gonna want to continue to work on. So maybe letting them know, hey, I've negotiated, no one's going anywhere, we're all gonna have jobs when this is done. So they can sabotage a deal, and sometimes inadvertently, if they get involved a little too early and are a little too concerned about it. So I would say bring them along after you know they're safe.

- Well, with respect to the team, how do non-owners potentially participate? Do they receive any form of payment or retention bonuses from the acquiring firms?

- Sure. You know, we do see a lot of firms that will try to do succession planning internally first, maybe sell 5% to a G2, that second generation owner, and then still, for one reason or another, realize that they need to do an external sale. So for those minority interest owners, those G2s, usually they're gonna see either a equity swap of their 5% stake into the larger organization that's acquired them or they're gonna get a cash buyout as well. But for someone who's completely non-owner in any way, in any shape, you know, they're not likely to necessarily get a signing bonus or any type of cash on this. But I would say as the seller, I'm certainly gonna negotiate for an employment contracts for them and making sure that they are at the very least no worse off than they are right now, and hopefully even potentially better off in the larger organization that might have more to offer for them in terms of both financial benefits, but then also, you know, more career pathing opportunities. At a larger organization, they might have more career advancement opportunities, and that could be worth a lot more to them than a few extra dollars in each paycheck.

- Yeah, no, that last point is an important one. I've seen many transactions where that's been just the case, where merging, you know, selling into a larger organization opens up new career pathways, additional responsibilities, again, the need for talent in the industry is significant. So part of the acquisition is the talent as well, and that can be very fulfilling and exciting when you have all the facts and all the answers. So I couldn't agree with you more. Bring them in at the right time when you have all the answers that they're gonna need, so they can be excited and not concerned.

- Agreed.

- So how about clients? You know, these are personal relationships, long-term relationships, some of them are not just clients, they're truly friends. When do you bring them into the loop? How should you communicate to them?

- Not until the ink's dry. You've got a retention requirement most likely in this buyout. And if you give them any indication that they should be worried before that inks dry, you're already behind the eight ball. So you wanna introduce the buyer to them at the right time after you've had the chance to explain to them the process you went through, how long you've been thinking about this, and that you're doing this for them. You know, for me, if I were to go into a Merrill Lynch office today and hire an advisor there, I have the certain sense of security knowing I will always have a Merrill Lynch advisor, I never have to shop for another one. It is the one way in which the wirehouse is still, are beating if, you will, the independent space. So this is kind of a systemic issue I think we have as an industry among independent advisors to make sure that there's this longevity of our businesses, and it's for the benefit of the clients. So I think we need to communicate to them, we've done this for them, we wanted to create this business to be sustainable, and if we couldn't completely do it in-house, we found them someone that we trust, that we've spent lots of time doing due diligence on. And for the most part, we see clients stick with their advisors through these transitions. 97% retention rates are about what we're seeing right now. And it's usually because the client already trusts you, you are their advisor. So if you're advising them to go in this direction, they're gonna listen.

- So to wrap up, what's one piece of advice you'd like to leave our audience with? If they're considering selling their firm?

You're selling your practice, you've got one chance to do this right. The decision to sell a financial services practice is often a really difficult one for advisors to make. They've spent a lifetime building up this business, and after years of earning your client's trust, how do you possibly turn this job over to someone else, will they work as hard as you do? Will they care as much as you do? Will they always put your client's interest first? So I think it's really important, assemble a team to help you do this, because you've never done it before, and you're never gonna do it again. So you gotta get it right this one and only time you're gonna do it. So have a qualified valuation analyst value your business, you know, employ the help of a tax professional for all of those deal terms you're gonna have to consider, you're gonna need a good attorney that understands the regulatory space, and possibly even your broker dealer, your custodian's rules and procedures as well. And ideally a qualified, impartial, non-advocate that's gonna work for both sides to get a proper deal done. Thankfully, we've got all those under one roof here at FP Transitions.

- Lovely. Well, Scott, thank you so much for your experience, the insights you've shared, the advice for those who might be considering selling their advisory practice. We hope everybody today gained some key insights and best practices, and remind you to stay focused on the end goal, the outcome, and the benefits to you, your team, and of course, your clients. As you begin this journey, know that we're here at SEI to support you in any way we can and bring great resources and insights from partners such as Scott at FP Transitions. Thank you, have a great day.

Jump to the most relevant parts of the conversation

Shauna Mace, CHPC

Head of Practice Management

Important information

The information provided is for informational purposes only and does not constitute an opinion by SEI. SEI Investments Company (SEI) is not responsible for the views and opinions expressed by Scott Leak. Scott Leak and FP Transitions are not affiliated with SEI. SEI cannot guarantee the accuracy or completeness of the information and assumes no responsibility or liability for its incompleteness or inaccuracy. They should not be regarded as legal opinion, advice or a recommendation of a specified course of action.

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