Whether it’s to prepare for retirement, take advantage of opportunities to grow a practice, provide continuity for clients and/or firm employees, offload certain compliance or operational responsibilities, preserve a legacy, or other goals, there are various compelling reasons why advisors opt to sell their practice through a merger or asset sale, particularly in today’s market when it’s a seller’s market where terms are often quite favorable for selling advisors. Yet, it’s vital for advisors to prepare thoughtfully in order to put themselves in the best position to achieve their goals with respect to the sale of their RIA firm. In this article, we highlight six important ways in which advisors can best prepare to sell their RIA to an external third party. For an article discussing how RIAs can opt instead to succession plan by selling the firm internally to employees, please click here.
First, it’s vital for advisors to have a clear understanding as to the goal or goals they are looking to achieve through the sale of their RIA. Without such clarity, advisors will not be able to identify what acquirors will represent the best option for buying the RIA. For instance, if the advisor’s goal is to sell the practice in order to join another team to expand the availability of services and personnel that can support the RIA’s clients or the business itself, the advisor should clearly understand how they wish to grow the practice in order to determine which firm offers the best products and services suited to help the selling advisor grow the practice.
Second, it’s vital for advisors looking to sell their RIA to ensure that any issues that could raise a concern for buyers to be properly addressed before the advisor explores potential suitors. In the process of selling an RIA, buyers typically conduct extensive due diligence to uncover potential risks associated with acquiring an RIA. This will include a deep review of the corporate history, financial statements, operations, and regulatory and compliance history of the RIA being sold. Selling advisors should ensure that they have cleaned up the balance sheet of the firm, developed and maintained proper financial and legal records, and addressed any uncorrected legal or regulatory violations that could raise a concern for an acquiror. Even if the acquiror does not discover a problem with the selling advisor’s business in the course of due diligence, typically the selling advisor will be required to make extensive representations and warranties to the buyer in the purchase agreement affirming that the RIA being sold does not create any material risks for the acquiring firm. Therefore, in advance of exploring a sale, selling advisors should clean up any problem areas, and, if they cannot be cleaned up, be prepared to proactively address such issues with the acquiror.
Third, advisers should consider reviewing their investment advisory agreements to determine whether they wish to amend them to make any sale transaction easier. One key area that sometimes creates roadblocks is if the RIA’s investment advisory agreements require written consent to the assignment of the advisory agreement (which invariably occurs when an RIA sells its book of business to another firm. Investment advisory contracts that simply require “consent” may be able to rely on the negative consent process whereby the client does not have to affirmatively respond in writing to a notice that the adviser wishes to assign the advisory contract to the buying adviser. If the RIA can accomplish amendment of any investment advisory agreement to eliminate the need for such written consent, this could make it more likely that the selling adviser will be able to effectively assign the clients’ advisory agreements to the buying adviser, which could potentially increase the purchase price realized by the selling adviser.
Fourth, selling advisors should develop a support team that can help guide them through the sale process. Investment bankers, attorneys, and consultants can be invaluable to an advisor seeking to sell an RIA business. Investment bankers and consultants can advise a firm on how to put its best foot forward with respect to a sale, provide valuation services, introduce the selling advisor to potential acquirors, and provide advice in the course of negotiating transaction documents. Attorneys can help a selling advisor in connection with the buyer’s due diligence, advise the acquiror on the optimal structure for the sale of the RIA, draft, review, and/or negotiate key transaction documents (which could include non-disclosure agreements, letters of intent, purchase agreements, and/or employment agreements), and prepare the documents required for closing of the transaction. For an article that discusses the steps and documents involved in an RIA merger or sale, please click here.
Fifth, selling advisors can obtain an independent appraisal to provide an objective opinion as to the value of their firm, which can be helpful in the process of negotiating a purchase price with prospective acquirors. There are numerous methods for valuing an RIA practice including valuations based on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) or EBOC (earnings before owners compensation). The value of an RIA can also be determined through the use of a discounted cashflow model that determines the value of the firm based on future cashflows. Alternatively, RIAs can obtain an independent appraisal from a firm specializing in valuation of advisory businesses. For a more in-depth article discussing how to value and RIA practice, please click here.
Sixth, to the extent possible, advisors should talk with other advisors who have sold their practice to better understand the logistical and emotional issues that are involved with respect to the sale of an RIA. The sales process requires advisors to be prepared, both physically and emotionally, to address the numerous steps involved with a sale, particularly since the advisor’s practice likely has involved a significant amount of the advisor’s blood, sweat, and tears over the years. Additionally, other selling advisors are likely to have tips and advice that can be helpful for a selling advisor that is just starting the process of selling his or her RIA firm. Advisors may also be able to introduce the selling advisor to potential acquirors.
In summary, while it takes time and effort, planning ahead of selling an RIA can increase the likelihood of success for the selling advisor.
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