When wooing Bancroft family heirs to sell him their controlling interest in New York-based Dow Jones & Co. Inc., K. Rupert Murdoch learned that money isn't everything.
Perhaps more important than a huge check to many family members was whether Mr. Murdoch would continue to publish high-quality, objective news. The Australian-born media baron satisfied the Bancrofts' non-financial demands and is about to take control of Dow Jones.
While solo financial advisory practices are far smaller than Dow Jones and are not owned by scores of fractious family members, financial advisers considering the sale of their business can learn several lessons from Mr. Murdoch.
Supply and demand. Like Dow Jones, financial advisory firms are highly desirable properties. Demand for successful firms exceeds supply.
But like the Bancrofts, a financial adviser should consider the non-financial aspects of a sale as thoroughly as they weigh its monetary value. In most enterprise transactions for non-personal-services businesses, the vast bulk of the value transfer takes place at the time of the sale: The buyer writes a check or gives shares, the seller hands over the business, and the deal is done.
The transfer of value in a financial advisory business is different. Typically, just one-third of the total price is transferred at the time of closing. The remainder usually comprises a note and an earn-out payout, both of which may be subject to future performance standards. This means that the seller and buyer of an advisory firm are linked for a longer period of time than in most business sales, which makes a successful transfer contingent on the seller and buyer's getting along far beyond the closing date.
With so much riding on personal chemistry, an exiting adviser will want to choose their buyer carefully.
Uniqueness of the business. Dow Jones has a singular asset: The Wall Street Journal. By contrast, financial advisory firms do not offer such a unique brand value. I say this not as criticism but as an observation. While each advisory firm is different in its mix of products, service delivery and ap-proach to financial planning, no advisory firm I know provides a product that can't be bought elsewhere, albeit from a different provider or with a different level of service.
As a result, prices for financial advisory firms tend to fall into fairly consistent ranges. Generally, transactional businesses fetch a one-time multiple of trailing-12-month revenue, while fee-based businesses tend to go for a two-times multiple of the trailing 12. I stress that this is a rule of thumb, not an absolute.
Nevertheless, I doubt strongly that a buyer would pay a 60% premium above market prices — as Mr. Murdoch did for Dow Jones — to acquire a financial advisory firm.
Outside advisers. Because the "formula" for the sales price of a financial advisory firm is generally known, and because the principals are financially astute — and the dollar values not monumental — most sales of advisory firms take place without the assistance of outside advisers, especially when ownership interests are transferred internally to current employers.
But using transaction counsel can make sense when the practice is larger and an adviser is considering a sale to outsiders. Since the process of meeting with many prospective buyers is so time-consuming, an outside expert can help in the screening process while the adviser continues to run the business. Also, because the tax consequences of any transaction can greatly affect an adviser's after-tax net, good tax advice is highly recommended.
You Inc. A financial advisory firm is typically an extension of its principals' ability to provide personal service to clients. For that reason, there are no significant synergies when one financial advisory firm acquires another — no layoffs, plant closings or merged product lines, for instance.
The best opportunities for post-acquisition growth and profitability come from having a greater number of satisfied clients. For that reason, the key to a successful advisory sale lies in increasing the probability that the buyer and current clients will be enthusiastic about the new enterprise.
Ironically, by approaching the sale of an advisory business as a fiduciary — in short, always having a good answer for the question: "What's in it for the customer?" — an adviser probably will wind up with the most profitable deal for himself.
John M. Leonetti is managing director of Boston-based Pinnacle Equity Solutions Inc., which helps advisers incorporate exit strategies into their practices. He can be reached at [email protected].
