Seven Things to Know as You Plot Your Exit Strategy
Well, I finally did it. We closed on the first of this year. After 26 years in the business, Taylor Financial Group is officially a wholly owned office of Carson Wealth Management, the country’s 6th largest registered investment advisor with $40B under management.
Transitioning your business (and exit planning) is not an overnight phenomenon. With that in mind, I discuss below seven things that I learned during this process (so far).
1. Start Early. I cannot stress this idea enough. With the average advisor age being 57, and succession planning requiring 3-5 years, the time is now (or almost now) for many of you. This process has so much more complexity than I could have imagined. And you will only do a deal once, so you must get it right. Over ⅔ of advisors are approaching retirement within the next decade — 35% within the next 5 years and another 33% within the next 10 years. That means almost everyone reading this article should be thinking seriously about their next step.
2. Treat Your Clients Well and They Will Support the Transition. Part of your payout may be contingent on retaining clients and revenue—maybe up to 70%. Be sure that you have built out your infrastructure and are selling from a position of strength and not weakness. Buyers will sense the latter, and you will not optimize your sale price that way.
Additionally, we deepened client communication by calling each client individually to explain the transition. We created a soft script to help initiate the conversation, and the outcome from our clients was remarkably positive. Those who had businesses understood the nuances of the backend and why this was the clear next step for us, while others appreciated the opportunity to ask questions and gain reassurance that we weren’t going anywhere.
As a bonus, these calls provided an extra touchpoint to address any account-related concerns. Most clients will not understand the economics behind the decision, and becoming wholly owned isn’t akin to throwing a retirement party. What it does is allow you to focus on your practice and outsource the administrative headaches, HR, payroll, compliance, and office manager functions that are a total headache. I handled the bulk of those responsibilities, mostly at night and on weekends, and I am looking forward to focusing more on our clients now.
3. The Devil is in the Details. Valuation multiples have reached historic highs, at 4- 7x revenue, a dramatic improvement from the era when advisors felt compelled to “die at their desks” due to suboptimal exit options. However, despite the head-turning multiples, it is not as if you receive a 100% payment in cash on the first day. There are lots of wrinkles and nuances to be worked out. Be ready for it—which brings me to the next point.
4. Be Sure to Have Great Representation. The biggest deal of your life — and the deal that will create intergenerational wealth for your family — should not be consigned to Jim on your softball team or a Main Street lawyer. Hire specialists who focus on M&A for financial advisors. There aren’t a lot of them. I had not one, but two, of the best. And I hired an investment banker. They were expensive. And worth every penny. You wouldn’t hire your local General Practitioner for brain surgery on your child. You don’t hire your local corporate attorney to do a specialized transaction of this sort. You seek out and hire the best. For those who are wondering, I used Ted Motheral, who was then with The Potomac Law Group, though now with Mercer Advisors, and Corey Kupfer from Kupfer and Associates.
5. Prepare your team early. Preparing your team can look different depending on your team, but make sure they are on your side. Take care of them prior to the deal. Treat them well and build trust. Be sure that they are loyal. You will need them as this is part of what the buyers are buying. This is your G2, and you need them in place so your practice can continue to grow and thrive.
We put in place several incentives for the team, such as raises, bonuses, stock appreciation rights, and additional benefits. They are thrilled as they are getting access to better health insurance and other benefits that we were simply unable to provide at any cost. They are also seeing a career path for themselves that I could not provide. Interestingly, many G2 don’t want the responsibility of running their own practice. Many are focused on balance and quality of life and prefer a stable paycheck. We can argue over the merits of this approach, but at the end of the day, I was pleasantly surprised by how excited the team was, including my own daughter, who works in the practice. She also didn’t want to be responsible for leading a large firm and the financial burdens that go along with it.
6. These Prices may not be Around Forever. RIAs’ ability to leverage higher multiples creates a clear arbitrage opportunity for them, making today’s market particularly advantageous for advisors seeking to monetize their practices while ensuring continued client care. Low interest rates and a booming stock market are also providing tailwinds.
But I am concerned. The market is starting to show some vulnerabilities. And once we have the first big downturn (likely coming in 2025 or 2026), I am concerned that buyers will use it as an opportunity to reprice. Maybe, maybe not. But, for someone who has worked 20-30 years building their practice, I didn’t want to take the chance on holding out for an even higher multiple. Sometimes things are good just as they are, and it is time to leap. Think about it.
7. Be Smart about Your Communications Once You Finally Announce. We drafted a written announcement and created a professional video for our clients. We also hired a professional videographer to create a short video that we sent to clients within 24 hours of the announcement. The video received a very positive response from clients
When it is all said and done, I am pleased with my decision to take this next step in my succession planning. What it means over the next five to ten years, I don’t know. I am not committed or boxed in to any result, but I do have the comfort knowing that there is a very strong back up plan for my clients and my team. And that is nice to know.
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