No. 2: A Bit of History
In the late 1990s, in my first years as a private securities attorney, I received a call from an RIA (Registered Investment Adviser) in my area and he said, effectively, “I need to wrap things up here. I have a nice little practice with about $50 million in AUM (Assets Under Management), I earn almost $1.0M a year. Do you think you can find someone to buy my practice?”
After a short, previous stint as a Securities Regulator, I knew most of the financial services professionals in the state and I thought, why not? I had never actually sold a professional services practice before, but it certainly seemed doable. I called several other lawyers in my network and found that they did not have any experience before either. So I called my friends in the Oregon Securities Division and asked them what they thought. The answer was quick, certain, and, as it turns out, dead wrong. It was something along the lines of, “You cannot sell an advisory practice. It amounts to a list of clients and nothing more. It is a bag of air.” I remember someone saying. I thought my idea, like a bag of air, had just been popped. But I was too young and green to know better so I called my CPA and asked him what he thought. His response changed everything and my career path as well.
He saw right through the issues. “An RIA has recurring, predictable revenue, low overhead, high profitability, and the clients are actually protected under Charles Schwab, Inc.? If a CPA practice is worth 1.0 x T12 (trailing 12 months gross revenue), an RIA practice has to be worth far more. Of course it is saleable. I’d buy it if I could.”
And at that fork in the road, I veered hard right (no political spectrum intended) and had my first seller listing. A few months later, I completed the transaction (in a completely disorganized marketplace, if one can even call it that) and I helped my friend sell his practice at a gross revenue multiple (GRM) of 1.5 x T12, on a 10 year earn-out and I patted myself on the back for my skills and ingenuity. Twenty years later, that multiple would double, banks would finance almost the entire transaction, and 50 buyers would line up for a chance to be “the one…”
After that first transaction, my wife, who was a residential/commercial real estate agent, said, “Why don’t you just start an RMLS (Residential Multiple Listing System) for financial advisors? I think this was the next fork in the road and I went hard-left and did it! This was shortly after the internet changed all our lives, so I hired a web designer and builder and we did just that. Many years later, we organized this particular professional services market niche and we changed a lot of lives. Values went from 1.5 x T12 on an earn-out arrangement to 3.0 x T12 with a 30% to 50% down payment and the balance bank financed. (Note: I have been using multiples to keep things moving forward and simple, though appraisers and formal business valuations are almost always used, and are the necessary and proper approach above $150,000 or so in gross annual revenue.)
For a long time, I called this process succession planning and so did everyone else. What else could you do other than sell your practice when you were done with it? Turns out, we were wrong, or ill informed. But we kept learning and listening. In almost every instance, these financial advisors did not want to sell their practices and walk away, regardless of the value or the ability to cash out – at least not as their first choice. They wanted to stay and keep working and making a difference in their clients lives. They enjoyed the income, lifestyle, tax breaks, and being the boss. They also wanted to give their next generation advisors and key employees a chance to buy them out and perpetuate the business. And so, we did just that. It might sound easy and obvious, but it took years to figure out the process.
In time, and with a lot of trial and error, we figured out how to give our clients what they wanted and we figured out how to help their next generation advisors take the risk and get the job done. It wasn’t easy, but it worked. We cracked the code of succession planning for the professional services provider.
We learned that succession planning is not about selling the business all at once to an outside or third-party buyer or a successor is someone who buys in a little at a time, proves themselves, earns the right to buy more equity, and becomes part of a team of next generation professionals who collectively become stronger than the founder or founders they were tasked with buying out.
No matter how valuable this most valuable of all professional service models grew to become in the eyes of a buyer, the no. 1 choice of the owners who called me for assistance was internal succession planning to sell gradually to key employees, perhaps a son or daughter, and keep it going.
As I prepared to write this new book, I read everything I could find on Amazon.com in the genre of Succession Planning. It seems that few, if any, of the authors in this space understand that selling a business to an outsider is NOT a succession plan. The more I read, the more I knew that I had to write this book and take the message to a larger audience, to all Professional Service owners, and explain that there is another choice, and a good one at that.
Thanks for reading,
David Sr.