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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 compelling reasons why advisors opt to sell their practice. That can be through a merger or asset sale, particularly in today’s seller’s market where terms are often quite favorable for advisors. Yet, it’s vital for advisors to prepare thoughtfully to put themselves in the best position to achieve their goals with respect to the sale of their RIA firm. In this article, I 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.
Have a clear understanding of the goals advisors are looking to achieve through the sale of their RIA. Without such clarity, advisors will not be able to identify which 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.
Ensure that any issues that could raise a concern for buyers to be properly addressed before exploring 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 during 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.
Review your investment advisory agreements to determine whether 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.
Develop a support team to guide your team 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 while 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.
Obtain an independent appraisal to provide an objective opinion as to the value of your 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 earnings before interest, taxes, depreciation, and amortization (EBITDA) or earnings before owners’ compensation (EBOC). The value of an RIA can also be determined using 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, 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 intellectually 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.
While it takes time and effort, planning to sell an RIA will increase the likelihood of success.
Richard Chen is a managing partner with Brightstar Law Group, a law firm that serves investment advisory firms by providing proactive business-minded solutions pertaining to corporate and securities law-related matters. Among other things, our firm provides counsel with respect to securities and compliance matters (including representation in SEC examinations), private fund formation, corporate formation and structuring, business transactions (including M&A and joint ventures), contract drafting and negotiation, employment law matters, operational due diligence, and succession planning. For more information, please visit our website at www.brightstarlawgroup.com or call us at 917-838-7398.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
