Top adviser Q&A: Glenn Kautt

Last April, Savant Capital Management and The Monitor Group announced they were combining firms. From a legal and tax standpoint, the deal is not considered a merger, but rather a “combination” because one firm didn’t buy the other, nor was there a stock trade. Glenn Kautt, who had previously served as president and chairman of The Monitor Group, is now the vice chairman of the board and a partner for Savant.

Why did it seem like the right time and situation to come together with Savant Capital Management?

There are some synergies between the two firms so that we have an almost identical investment philosophy and financial planning approach. But they had a wider range of clients they would serve all the way down to $50,000 in assets, whereas we have a $1 million minimum. Because of our work with high-net-worth clients we have estate tax planning and prep services that are more advanced than what Savant has. Savant, on the other hand, had a wider bench in investing and planning with six people who do full-time investments and four people on full-time planning.

The business model delivers a product or service and can’t change too much. What changed was the organizational design. Most small businesses are benevolent dictatorships run by one or two founders or owners, and pretty much what they say goes. But that model going forward doesn’t create any continuity. When you think about creating a governance mechanism that is permanent, it wasn’t difficult to look at public corporations and using a [board of trustees] model in which you create a legal structure that manages the CEO, approves the financial budget, approves a business plan, and sets and manages the dividend policy. Our board has inside and outside members, meaning that the outside members don’t own shares. The board must act in a fiduciary fashion so that we are a private corporation acting like a public corporation.

The response from other business owners is that they think this is a sea change. We want to attract other like-minded wealth firms to come on as shareholders and build a business that has some pretty long legs.

What was the biggest challenge in the process of bringing the two firms together?

Most entrepreneurs don’t get into the business planning how to get out. They get in for the freedom, the flexibility of being their own boss, or maybe that was the only route open to them. Unless you are one of those people who is absolutely willing to step away from the podium and microphone and the power levers, there is always going to be some angst. Unless you are being bought out, you are taking a risk because you are ceding some control or taking this person into your circle that has an impact on your business.

In our situation we have a board that is legally set up to manage the CEO, so if the CEO doesn’t perform the CEO can and will be replaced. You are giving up management control but not business control.

Anytime there is a combination of firms coming together there is also the challenge of valuations. Both [The Monitor Group Inc. and Savant Capital Management Inc.] paid the same company to do valuations on each firm. I have had several offers to buy my firm in the past so I had a [letter of intent] with a value of my firm from another buyer, which turned out to be exactly the value the independent company came up with as well. Many people who own practices or small businesses that have never had a formal valuation have a sense that their business is worth more than it actually is.

A lot of the M&A deals we have seen recently have involved firms selling to private-equity companies, rather than two RIA firms coming together. Is there an advantage to what you guys did over the private-equity model?

When you do the real math on how these things work out, if you are selling to a private-equity firm and you don’t get the premier deal or capital gains taxes go up, then instead of that 100 cents on the cash flow dollar you are getting 20 cents on the cash flow dollar. An older man or woman who is tired and seeing diminishing returns from their efforts may be willing to take it, but nobody who’s healthy would take it. When they look at the economics of a private-equity deal it’s horrific.

A dividend won’t be 100% of what you were making before, but it won’t be 20% either. You can remain engaged in a senior level for a period of time helping out junior professionals in your firm, and you will get paid better than any other mechanism out there.

The Monitor Group and Savant were both pretty big firms that have now formed an even bigger firm. When you look at where the industry is headed, do you think having scale is going to become more important?

I would say it depends. We are interested in having cutting-edge technology, process and procedures, and to hire the smartest people we can find. Scale isn’t terribly important so much as being at the cutting edge and leading edge of technology, service offerings and client services. If world domination was our goal, then maybe getting bigger would be groovy. But we want to be thought leaders in every area that we touch; big doesn’t mean you’re profitable, it doesn’t mean you’re doing a great job or offering the best service. Big for the sake of being big is not good.

That being said, I think we have a very attractive firm and it is inevitable that we are going to grow. I could see us being at $5 billion in assets in five years easily [from nearly $2.7 billion currently].

What advice would you give someone who is thinking about exploring an M&A deal?

You have to think about what your goal is and what it is you want. If the goal is to get the maximum amount of money, they should look into how they can effectively transfer into a setting where they participate in an ongoing cash flow. If the goal is maximum safety they should look to get out right now and configure the firm where they can take the cash and walk away.

Whatever the desired outcome, they should sit with an independent consultant who has actually done M&A work. They need someone to explain what they face to get their firm ready for a transition — organizationally, financially, maybe even legally. It may take years, but if you don’t use an independent consultant you likely won’t be able to get what you want when you want it.

I also strongly urge people in this situation not to employ attorneys at any point in the negotiations until a definitive agreement has been signed. They are there to negate almost every forward move. Attorneys will radically slow things down and likely blow up a deal.

Advisers wishing to contact Glenn Kautt with questions or comments can do so at [email protected].