Key Highlights
This report has a long list of interesting facts to share:

The Emergence of the Succession Planning Issue
This section outlines the emergence of the succession planning issue:

• Advisors are aging, making succession planning a key issue (51% of all independent advisors are over age 50)
  
• More than half (53%) of fee-only financial advisors and half (50%) of independent reps intend to sell their businesses upon retirement, with selling to an existing partner or employee being the most popular planned exit strategy
  
• Most advisors are not prepared to retire; most lack written succession plans (only 45% of even the largest fee-only financial advisors and 29% of the largest independent reps have written succession plans)
  
• Some of the potential acquisition activity is not related to an exit strategy but rather the ability to build something bigger with more resources (upwards of 60% of solo financial advisors may have either thought about or are attempting to merge with other firms)
  
• There are five types of buyers that can be grouped into two broad categories of situational buyers, consisting of employee buyers, partner buyers, and competitor buyers, and systematic buyers, consisting of financial buyers and strategic buyers
  
• Historically, the majority of transactions have been situational employees, partners, and competitors (e.g., Jim & Victor Conrad; Kirr, Marbach, & Company; and The Monitor Group)
  
• The vast majority of transactions involve employee buyers, but they receive limited reporting (employee buyers account for 60% of all financial advisory firm sales)
  
• There have been four successful financial buyers (e.g., National Financial Partners (NFP), Highland Capital, Clark Consulting, and Wealth Trust)
  
• The most successful firm, NFP, has bought 153 firms and acquired the second most successful firm, Highland Capital
  
• There are five categories of strategic buyers, including national retail banks, regional retail banks, local retail banks, CPA firms, and boutique & upscale firms
  
• There is a growing number of strategically oriented situational buyers; they are often structured as mergers based on the logic of capturing synergies (e.g., Laird Norton, Asset Management Group, and Lydian Wealth Management)
  
• The emergence of knowledgeable advisors (succession & transition planning advisors and business brokers & M&A advisors), marketplaces (both independent and captive), and funding sources should help advisors facilitate transactions; for example, Business Transitions provides two online marketplaces for financial advisors to buy and sell their firms, RIA Transitions and FP Transitions
  
• There are five potential buyers, including financial buyers, strategic buyers, competitor buyers, partner buyers, and employee buyers; advisors seeking to sell should clarify their own goals to determine the best fit
  
• Financial buyers offer high prices but generally include risky private stock as payment; they allow owners the most autonomy relative to other systematic acquirers
  
• Strategic buyers are seeking to acquire big firms and are paying high multiples for them; they are seeking to create revenue synergies and should be able to offer the most; they require sellers to stay and grow their firms while relinquishing autonomy
  
• Competitor buyers expect sellers to exit over time and are risky for sellers since they necessarily need to divulge firm information for due diligence, possibly exposing themselves to buyers taking advantage of the situation (e.g., share client list and negotiations end)
  
• Partner buyers might not be an option for most advisors since few have partners; furthermore, sellers to partners are not likely to realize the same value from selling to a third-party and these sellers are often paid on a earn-out basis and exit over time
  
• Employee buyers lack buying ability and also expect sellers to exit over time
  
• There are five key valuation methods: book value, assets under management percentage, revenue multiple, cash flow multiple, and discounted cash flows; the discounted cash flows model is the correct way to value almost any business
  
• A big valuation discrepancy exists between the amount advisors think their practices are worth and the amount for which they are actually being sold
  
• There are four key value drivers: revenue sources, institutionalization, benchmarking, and client demographics
  
• Fee-based businesses receive higher multiples than commission-based businesses
  
• Institutionalization creates value by making it easier to transfer a business
  
• Benchmarking allows buyers and sellers to see how a firm stacks up against other firms
  
• Client demographics matter; buyers are seeking moderately older clients since they tend to have larger portfolios
  
• A fall-back business continuity plan should be developed even if advisors are not contemplating retirement in the outside chance of death or disability
  
• Sellers positioning their businesses for sale need to prepare written documents to describe their businesses
  
• There are five buyer search methods, including supermarkets, network with broker/dealer, custodian, and product company wholesalers, network at broker/dealer and trade group meetings, run ads in industry publications, and utilize business broker or advisors (50% of tax professionals have been introduced to a buyer or seller through industry activity, 30% hired an advisor for search help, and 20% utilized online supermarkets)
  
• Negotiating a transaction consists of ten steps, including sign a confidentiality agreement, review financial statements, the client base, and work products, examine cultural issues, negotiate price & terms, draft a letter of intent, complete a legal document review, purchase audit, and other necessary due diligence, determine the appropriate purchase methodology, negotiate dozens of non-financial issues, discuss planned reactions to all possible scenarios, and get a well-written purchase agreement
  
• Sellers need to spend time preparing for the close; key issues include preparing one’s staff and developing a comprehensive client list
  
• Making it work after the deal requires commitments from both the seller and buyer to carry out synergistic plans; key steps include creating one team, informing clients, creating uniform products & services, aligning compensation plans, integrating offices, systems, & other business model issues, and transferring trailers
  

Future Predictions for Financial Advisors Mergers & Acquisitions
This section outlines the future predictions for financial advisors mergers & acquisitions:

• The aging population of independent advisors could be a crisis or opportunity for independent broker/dealers and custodians (independent advisors over the age of 50 control more than half of the revenues at independent broker/dealers and custodians)
  
• Independent broker/dealers and custodians that help facilitate the acquisition of advisors may be better positioned to capture the asset transfer as advisors retire
  
• Numerous opportunities exist to help, including developing conference presentations, conference workshops, workbooks or web sites, valuation tools, supermarkets of buyer and sellers, financing packages, transition offices, fallback purchase offers, and buyers’ kits
  
• Succession planning issues also provide a value-added opportunity for mutual fund and other companies
  
• There is an opportunity to design a legitimate advisor acquisition strategy but many advisor acquisition strategies have lacked merit and fee-only financial advisors are a finicky and skeptical group; specifically, fee-only financial advisors often argue for principals and fail to execute, have a strong desire to retain autonomy even when acquired, view a product push as a deal killer, and are a diversely opinionated group
  
• There is also an opportunity to consolidate a group of mid-tier advisors to create a producers group to bond them together
  
• When an advisor dies with no plan in place, key issues include identifying an appropriate buyer, negotiating a fair purchase price, financing the transaction, and re-titling the assets
  
• There is an opportunity for a lending source to emerge in the financial advisor acquisition market; specifically, a lending broker may be successful in this industry
  
• The financial advisor acquisition trend is emerging throughout the world
  

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Tiburon Strategic Advisors