WEALTH MANAGER-Preparing a wealth advisory business for sale

* Record start to year for advisory firm M&A

* Valuation of firm usually a multiple of cash flow

* Sellers need to show strong growth prospects

By Helen Kearney

NEW YORK, June 14 (BestGrowthStock) – In what is shaping up to be a
record year for sales of wealth management firms, advisers
looking for the best possible deal need to look at their
business as if they were a buyer.

Whether advisers are considering a sale to an independent
firm or consolidators, there are three key factors that
influence price: cash flow, growth prospects and risks.

“All advisers need to understand the basics of valuation
and what the success drivers are for the organization,” said
David Devoe, head of strategic development at Charles Schwab
Corp’s (SCHW.N: ) advisory services unit. “It optimizes their
valuation when they’re ready to sell but it also makes for a
better business in the meantime.”

As markets recover and a wave of aging advisers looks for a
path to retirement, advisory firm sales are expected to
increase. In the first four months of this year a record 28
firms with $24 billion of client assets were sold, according to

The most important consideration for buyers is not revenue
or assets but free cash flow: what the adviser has left after
paying salaries, rent and other expenses. This means advisers
need to keep a lid on costs.

On average, advisers selling their business can expect to
receive around eight to 12 times current cash flow, but this
can vary considerably depending on the type of business, said
Dan Inveen of FA Insight, a consulting and research firm for

Buyers also consider how much a business is likely to grow.
This is based partly on assumptions about future market
conditions, but advisers need to show they have a strategy for
attracting new clients, said Kim Dellaroca, director and
segment and practice management at Pershing LLC.

They also need to show that current clients are happy with
the firm by conducting regular client satisfaction surveys.


A firm may be less valuable if its assets are concentrated
among a few clients, or if many clients are approaching
retirement age and poised to start withdrawing money.

Strong loyalty to the adviser can also be a deterrent,
since clients are more likely to follow the departing adviser
after the sale. A business owner needs to show the business
does not depend on his or her presence.

“You need to implement processes that are repeatable and
transferable as opposed to the knowledge on how to do things
just existing in staff members’ heads,” said Inveen.

This includes generating a step-by-step guide for bringing
in new clients, creating account statements and other elements
of the business.

Merger advisers stressed that sellers should not expect to
take the money and run. Most deals require the selling adviser
to stay on for at least three years to help settle clients in
at the new firm, said Dellaroca.

The seller will usually receive 20 percent to 35 percent of
the overall price in cash upfront, said Inveen. In the past,
advisers could expect 30 percent to 50 percent upfront, but
that has fallen as a result of the turbulent markets.

“If the buyer can decrease the upfront payment, he can also
decrease the risk,” said Inveen.

The rest is likely to be paid out over the course of five
years, though Inveen said he has noticed that this has been
extended to seven years in a number of recent cases.

The buyer and seller will usually pick a date, often 12
months after the sale, to assess how many clients stayed with
the firm, whether revenues grew as predicted, and adjust deal
terms accordingly.

“This gives the seller time to do everything he can to move
the clients over, but it’s not so long that he is out of the
picture and the buyer could have impacted the business
negatively,” said Devoe.

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(Reporting by Helen Kearney; Editing by Steve Orlofsky)

WEALTH MANAGER-Preparing a wealth advisory business for sale