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Cashing in on the seller's market for advisory firms

SuperUser Account posted on September 02, 2014

NEW YORK Tue Sep 2, 2014 1:45pm EDT 

(Reuters) - When Chicago-based broker Nick Brait, 62, wrote his five-year plan in 2012, he decided that by 2017, he wanted to spend almost half of every year traveling the world and sailing the U.S. Great Lakes.

The best way to accomplish that, he figured, was to sell his financial practice, Lasting Legacy Ltd., and gradually move to a scaled-back schedule.

He and his business partner Mary Moyer-Barrett, 60, started laying the groundwork. They moved many of their clients to fee-based accounts to generate a regular source of revenue, and they had their books audited. They met with four potential buyers and ultimately sold in 2013 to SAGE Private Wealth Group, an independent advisory firm with Raymond James Financial Services run by their former Edward D. Jones & Co colleague, Khaled Taha.

Their timing was excellent. Registered investment advisory practices are selling at all-time highs, averaging two to 2.5 times annual revenue, as many firms seek to grow by buying already profitable competitors.

Although they didn't get top dollar, Brait and Moyer-Barrett did well. Taha said he offered between one and two times annual revenue. The deal also included other sweeteners and the chance for Brait and Moyer-Barrett to stay on in specialized roles, according to a source familiar with the arrangement.

To be sure, not every retiring adviser will draw a fantasy price when it's time to sell.

Many advisers do not know the value of their practices and actually over-estimate how much their businesses are worth, according to a study by CLS Investment, a Nebraska-based third party asset manager. It found the average adviser pegged his practice at $750,000 to $1 million, when in fact not every practice is sellable at all, many sell for less and often advisers have to finance part of the sale themselves.

But advisers who plan ahead can use the current market to build a bigger deal. Here's how.


Even advisers who aren't ready to sell should pay for an independent appraisal of their business. Getting a realistic figure might help them make transitional decisions, says Randy Carver, whose Ohio-based Carver Financial Services is Raymond James Financial Services' top revenue producer.

In September of 2013, he estimated his Ohio-based Carver Financial Services firm, then with $6.12 million in revenues, was worth around $10 million. But an independent appraisal put it at $13 million.

Keeping up clean and independently audited books can raise the price of a business from, for example, six times earnings excluding interest, taxes and depreciation, to seven times EBITDA, says Shirl Penney, president of Dynasty Financial Partners, which provides services and financing to support RIAs.


Tom Orecchio of the New Jersey-based Modera Wealth Management said advisers likely overvalue their businesses because it is inaccurate to use simple metrics like earnings or revenue to guestimate business value. Other factors, like steady income, overhead costs, local markets and type of client also will factor in. "The most critical (sales point) is not the earnings, but the culture."

Carver considers the most significant financial factor to be how much of a firm's revenues are generated by recurring sources, such as annual advisory fees.


Advisers too frequently sell to the first bidder, often someone already working in their firm, says Rick Rummage, president of Washington D.C.-based career consultancy Rummage Group. Talking to other potential buyers can give a seller valuable insights and sometimes raise the selling price.

Some advisers may do all the research and take the opposite tack of Brait and Moyer-Barrett.

Gil Baumgarten has turned down half a dozen potential buyers since leaving UBS Wealth Management Americas and starting his own RIA, Segment Wealth Management, in Houston in 2008.

He turned down offers of as much as five times his earnings because he believes he can earn more over the next five years by continuing to grow his firm. Baumgarten figures that may help him reap a higher price when he does eventually decide to sell.

(Reporting by Elizabeth Dilts; Editing by Linda Stern and Dan Grebler)