6 In 10 Advisors Want To Sell Their Firm, But Only 3 in 10 Have A Plan

At least six in 10 financial advisors expect to sell their firm in the next 10 years, but only three in 10 have a succession plan, according to industry analyst Tiburon Strategic Advisors.

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“If this actually plays out,” said Chip Roame, Tiburon CEO managing partner, “60,000 financial advisor practices trade in the next 10 years – 60,000. That’s a crazy number when you have to think about that.”

Forty-five percent of financial advisors said they are very likely to sell in the next 10 years, 20% said they were somewhat likely, according to data Roame presented in a research call on Thursday. All financial advisors and insurance agents are included in the data.

The high number of advisors considering succession makes sense when considering how many advisors are older – nearly eight in 10 financial advisors are over 40, Roame said.

“The industry is aging,” Roame said. “A lot advisors have built up a value they want to monetize.”

A majority of the transactions involve insurance agencies, which encompasses life and health along with property and casualty. But Roame expects to see significant growth in independent advisor acquisitions, particularly registered investment advisors.

No matter which space they are in, Roame said advisors tend to go wrong when trying to assess their firm’s value.

“I hear the funniest things about how to value a firm,” he said. “The right answer is use the value of firm based on discounted cash flows.”

Cash flow might be one of the multiples that a firm owner would focus on but it is not that simple, Roame said. It would have to be a discounted cash flow to account for variables such as an owner taking a large salary or even no salary.

Business evaluation is one of six elements Roame identified as elements of the transition:

Find a succession advisor

In selecting a succession advisor, Roame suggested a financial advisor coach rather than an investment bank because the bank would be looking for a quick transaction. A coach would help think through the plan and review all choices to determine the best route. Fifty-six percent of advisors plan to use a succession advisor.

Clarify objectives

Do you want to sell the business or maybe just work less? Do you want to own it and have someone else run it?

Obtain business valuation

A business can be evaluated on discounted cash flows, multiples, return on investment and book value. Multiples are popular because they are easiest to obtain and grasp, Roame said. But he favors discounted cash flows because “what you’re really selling is the future cash flows of your business.” Seventy-six percent plan to use a business evaluation financial advisor.

Consider alternatives

The range of buyers consists of strategic buyers, financial buyers, competitors, partners and employees.

Execute internal transition

The choice might be to sell to employees or another sort of internal transition.

Execute fallback business continuity plan

Every advisor should have a fallback business continuity plan. “Even if you’re not ready to sell your business, you know it’s the old if-I-get-hit-by-a-bus story,” It does not need to be a succession plan but a plan to operate in the owner’s absence.

RIAs will be the “hot target” in the growing independent advisor acquisition segment, with a range of buyers.

“You’re going to see mid-tier advisors buying up smaller advisors,” Roame said. “Aside from, the big aggregators you’re still going to see the $200 million or $500 million RIA firm buy up the $50 million RIA firm because it’s still good business for them.”

Steven A. Morelli is editor-in-chief for AdvisorNews. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at smorelli@adnewsfeedback.com.

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