Podcast: Back to Business in 2021! Buyers Beware: 5 Mistakes to Avoid in Seller Prospecting

In this second episode of the "Back to Business 2021" series Scott Wetzel, Aaron Hasler, and Kara Miller join Mike Langford for an in-depth conversation on how RIAs and independent financial advisors can best prepare for buying a business.

You can watch a video of the webinar on the SkyView Partners YouTube channel.

To listen to the episode simply click play on the audio stream below or listen and subscribe on your favorite podcast platform. You can find The Advisor Financing Forum on Apple PodcastsSpotify, and Stitcher.

Transcript

Mike:

Hi there, it's Mike Langford. Welcome to the Advisor Financing Forum, a podcast presented by SkyView partners. This week on the show we're continuing our back to business series with a conversation we are titling Buyers Beware: Five Mistakes to Avoid in Seller Prospecting. Like last week this is an audio version of a webinar that we hosted for the SkyView community. Scott Wetzel, Aaron Hassler and Kara Miller share some fantastic advice for RIAs, and independent financial advisors who are thinking about buying a business in 2021 or beyond.

Mike:

If you'd like to see a video of the webinar you can find it on YouTube on the SkyView partners channel. While you're there, make sure you give the video a like and subscribe to the channel so you can stay on top of all the great content that the SkyView team is putting out to help you with your M&A financing needs. And of course, make sure you subscribe to the podcast on Apple, Spotify, Stitcher, or wherever you'd like to get your podcast jam on.

Mike:

Before we dive in if you have questions about anything we covered on this webinar, or if you'd like to explore your financing options for M&A, succession or other use cases, feel free to reach out to the team at SkyView by calling 866-567-6282 or simply swing by SkyView.com and click that get pre-approved button or simply shoot an email to info@SkyView.com and someone will get right back with you.

Mike:

Okay, it looks like the flux capacitor is ready to go. Remember, you've got to hit 88 miles per hour to initiate time travel. So buckle up, let's get back to business. Hi everyone, welcome to Buyers Beware: Five Mistakes to Avoid in Seller Prospecting. My name is Mike Langford and with me today are Scott Wetzel, CEO of SkyView partners, Aaron Hassler, a managing partner, leading advisory practice, mergers and acquisitions consulting and the incomparable Kara Miller, Managing Director of banking and M&A services.

Mike:

This is the second webinar and the SkyView back to business in 2021 series to kick off the new year. If you happened to have missed the first one, you can find a recording at SkyView.com/educate. We're also publishing a special audio version of each webinar on our podcast feed. Just search for the Advisor Financing Forum or skivvy partners on Apple podcast, Spotify, Google and any other major podcast platform. Okay, let's get to it. Hi, team. Great to have you this morning.

Aaron:

Thanks for having us.

Scott:

Morning.

Kara:

Nice to be here.

Mike:

Yeah, it's great to see you. I love this face to face for the webinars, it's perfect. Well, one of the things we started talking about and prep for the show is that everyone likes to think they're a buyer out there in the marketplace. And I saw a stat sometime in the last year or so indicating that there's somewhere in the neighborhood of 50 advisors looking to buy a practice for every advisor who is considering selling a practice. That might be a good start for us today. Why is that ratio of buyers to sellers, so large, and I guess, more importantly, are there really that many advisors out there hunting for practices to buy, and they will kick that off with you, Scott?

Scott:

Yeah I'd say there's certainly dislocation, it's still a seller's market out there. And as Aaron, and I traveled around doing road shows, when the world was still spinning, we go in a group of 1,500 people, whatever it was, and we'd say, "Raise your hand if you're a seller." And of course, everyone's afraid to admit that amongst everyone there. Then how many are buyers and the entire room raises their hands.

Scott:

And what we found is a lot of people feel that they are buyers, the number of qualified buyers is far less than 50 to one, it may be as low as four to one and maybe 10 to one. But there's a tremendous number of people say "Yeah, I'd buy a practice provided the opportunity." And then we have a great opportunity. And one of our buyer representatives from Apple gives him a call says, "Hey, we got a practice in your backyard." And they say "I'll pass." So that number is inflated yet at the end of the day, it is a seller's market.

Mike:

Interesting. So Kara, you talked a lot about that. You and I did a podcast together back in 2020. And you were talking about kind of that same general concept that there's lots of sellers out there that they're willing to sell. But it's got to be like a price is right to everything. They almost have to be forced out of selling. So it seems like Scott was talking about, you got two things driving this thing or you've got the qualified buyer. Not every buyer is qualified. We also have to have the seller that's willing to move. What do you think's kind of behind the kind of the high ratio in kind of the seller buyer dynamic.

Kara:

Well, there's definitely a hesitancy on the part of sellers to pull the trigger. Some of them enjoy their jobs, they don't find it particularly taxing, and they feel like they could retire in place. And that might not be the best thing for their clients. And sometimes they hesitate so long, they drive their practice into the ground, and it sort of disappears into the ether, and there's almost nothing left to sell. So there's a sweet spot to timing. We like to see advisors consider selling by the time they're, I don't know, Aaron, what would you say like 65, late 60s, that's when their practice is at it's peak height, and they have the most to gain from a transaction.

Scott:

I'd add to that I'd say 90% of our investment banking deals, we're talking to sellers about remaining involved with the practice, because as Kara pointed out building the practice is exceptionally difficult organically or through M&A. And once it's built, it's somewhat on autopilot. But to the extent sellers want to experience a liquidity event, and stay on in some capacity, relationship, otherwise they enjoy doing that.

Scott:

And that's how 90% of our deals are structured. So definitely need to convey to people interested in buying and for sellers out there that this is not just a sell your practice and beat it. We want to see those sellers involved with the practice helping with relationships, being involved to whatever extent they want. And also they can relinquish the tasks that I know I need doing. If I could find a similar transaction, I'd love getting rid of the operational administrative tasks and experience a liquidity event prior to what Kara said that eventually the practice does start to deteriorate over time.

Aaron:

And the seller is going to stay involved like that. And so the seller needs to have some energy, Mike, and one of the things that we look at is for sellers to have that conversation early. And for buyers to help understand where the seller is at in their career so that there is some gas in the tank, if you will to work with the transition process and work with the new firm. So that it goes well on a go forward basis.

Kara:

I will add it's never too late to look at selling the practice either. No matter what the conditions are, no matter how long a seller has put off succession planning, it's never too late to have a great transaction with an excellent outcome, good revenue from the sale and a good post transaction role for the seller if they want it.

Mike:

That makes sense. So that was a great way to set the stage here. One of the things we just kind of laid out for everybody is competition is going to be stiff for the best deals. Almost by definition, because if you are an advisor who's built a robust business, it's on autopilot, as Scott just described. It's valuable. And because it's on autopilot, if you're the owner of that business, you kind of like "Why would I sell maybe I'll just kind of stick with this thing."

Mike:

So there's going to be a high level of competition if you are a buyer, and that's what this particular webinar is about is how do you as a buyer, avoid some of the common pitfalls that you guys have seen at SkyView that many buyers or would be buyers make in the process? So let's jump into some of those pitfalls that people tend to fall into and help them avoid them. And I think maybe to start with at first is choosing the right size of the business to target. So you're thinking about buying a business? How big is the business that I should buy? So why don't we start there? What is the right size? Or what are the things to consider if you're a would be buyer, when you're considering the size of business you should buy?

Aaron:

Mike, one of the things that's been interesting about when you incorporate bank financing into these structures is that it provides a lot of security for the seller. But what it does is it does add some complexity for the buyer in terms of we look at loan to value ratios of the practices. And we're looking at the available cash flow. So a buyer has to be realistic about how much can they take on, in terms of the number of clients? How much revenue can they work with? And how much can they afford, based on the revenue that's coming in from the sellers practice combined with their existing practice?

Aaron:

And have you managed an infrastructure like this before? And are you used to that size of an enterprise? So we really like our buyers to look at, based on our metrics and based on our light underwriting, through our advisory practice board of exchange purchasing power tool is the idea of taking out a practice that's the right size for your business, and then ramping up over time as you do consecutive acquisitions. And so we're looking at, I would say, the most common buyers for us are probably buying an equal sized practice, if not slightly smaller than their own. Sometimes we see a buyer, buying a larger practice for the first time around. But it's incrementally larger than their existing practice, it's not a big leap forward. So if you're $100 million buyer, you're looking at maybe a practice that's 150 million in assets under management on the high side, down to anything that's smaller.

Scott:

And we certainly don't want to throw water on anybody's fire and going out and whale hunting and trying to get the transaction done. If you can find an accommodating seller that's willing to be out as a co-guarantor, or stay on as a partial owner, there is ways that we can structure the transaction, but it's really about really sold prop after a quarter billion dollar operation and not having the infrastructure to scale and not have any plans to keep the existing employee base. So just keep in mind that if you're sitting out there with 50, 75 million, then maybe taking down $25, $35, $50 million chunks of time, before you get to that quarter billion dollar league. So when you start looking more a quarter billion dollar practices, and there is less competition in that $30 to $50, $70 reigns and at a better price, so something to consider.

Mike:

Seems to me as I think about the size approach, and you guys touched on it just a little bit and that there's two things. Obviously, there is from a business and continuing operation perspective, can you digest this deal. You mentioned if you're a solo operator, looking to acquire a business that has like five advisors under one roof, and it's three times the size of your business. If you never manage a business like that, it might be very difficult for you to digest that acquisition. But there's also the financing side of it as well. Are there certain components that you look on the financing side that suggests what size and advisor should go for, beyond AUM, I guess.

Kara:

Yeah, so with our focus, which is generally to finance 100% of the acquisition, the sale price for that seller, it gives them the security. So what we would look at is that loan to value ratio. So a buyer is going to look at the combined value of their existing practice, plus the practice they're purchasing. And then you subtract the amount of debt you have on the practice, and that's your loan to value ratio. And so that's the factor that we look at. If Scott, as says you want to... There are some advisors that can successfully buy up and buy a whale. But then you have to modify the deal structure. So when we want to do these 100% finance practices, that's where it's really critical for us to look at that loan to value ratio. And we like to stay at around a 70% loan to value ratio or a little bit lower.

Scott:

And just to give you an idea of our transactions in 2020. Of the close to 70 transactions we did last year, only 13% required any buyer equity down, and of those 13, on average it was only 15% of the total purchase price. So in those practices that didn't require it was, I can presumptively, a smaller practice is buying larger where there needs to be some more buyer equity in addition to that buyer's practice, a lot of time with an internal succession. And that kind of leads us back to some of the conclusion of why buying like sized acquisition targets or smaller, certainly works best where your access to capital and ability to actually incorporate that business and scale that practice in your existence.

Mike:

Makes a lot of sense. Yeah, it was interesting. Aaron and I chatted in the previous episode of this series, previous webinar in this series of you watching the webinars, about what that 100% financing means. You talked about loan to value ratio there Aaron, when you're combining two businesses financing 100% of the acquisition doesn't end up meaning you finance 100% of the business. A new business, it's a much smaller financing ratio there. So really good stuff to keep in mind. And obviously reach out to the SkyView team if you have questions about that.

Scott:

And also, I'll say that when Aaron and I went out and gave presentations around 0% down and we were accompanied by many industry participants been in the biz for a while and we'd co-present they'd kind of look at us like we're crazy. But for a number of reasons. Aaron's hair, his closet. After the last three plus years, we've substantiated that your practice has substantial value, equity value, you bring to the equation when buying another practice, and the value of newco is extremely valuable.

Scott:

So we have more than substantiated that in most deals, that there is no buyer equity required to finance the transaction. Which naturally someone in finance that makes you nervous, it should not. The reason behind it, the fundamental premise on that is we believe practices are undervalued where they sit today. So that's good news for everybody that owns a practice but then everyone throws popcorn at me for who wants to buy practices. But I can tell you, our most successful buyers are paying a premium multiple every time.

Kara:

You know, and I'll add the last piece on Scott's message, which is that at the end of the day, what SkyView is doing is trying to help advisors understand the commercial financing marketplace. And so we will get creative and we will help them identify a deal structure that works for their particular transaction. So we never say no to a client, we say, "Okay, let's understand your transaction. And how can we modify it to fit within the parameters that we need it to." So if you have two willing parties that want to put together a transaction, we work really hard to figure out a way to make it happen.

Mike:

Now that we've got the kind of the size that an advisor should be thinking about kind of framing in their mind, okay, if you're thinking about making a business acquisition, growing through acquisition, here's the size you should be looking for, in relation to your own business. Now, let's shift to kind of the strategic work that comes next. There must be some buyer strategy involved that should be followed before you just start, like reaching out to folks like "Hey, I want to buy your business."

Scott:

Yeah, Kara on our team is probably best at... Really, Kara is the best in the business at sourcing new opportunities. Maybe I'll let Kara kind of tackle that one.

Kara:

There's a lot of competition, Mike for the type of buyer that says I'll buy anything, anywhere, somebody that has just has a very vague strategy. There's no deals to be had for sure in that type of situation. And sellers are more likely to connect with somebody who they view as a potential business partner, somebody who says our client service models are similar, or we have the same investment philosophy, or we're uniquely set up to give your clients an excellent experience, where one plus one equals four. That's what a lot of sellers are looking for. And if somebody just wants to be an investor, that's a whole different strategy. And if that's what a buyer wants to do, they really have to acknowledge that.

Scott:

And I'd say also that the buyers need to understand that as a core component of our investment banking process is ask a lot of questions of prospective sellers, and don't go in presumptively and think like, "Hey, I just need to write a huge check, or I just need to do X or Y, or Z." Go in and see what their interests really are, and see if you're willing to accommodate that. And better understand what their goals and their plans are and find out what your target is looking for and offer it to them. It's that simple. We find that a lot of acquirers have a set playbook and they just try to execute and they don't want to deviate. Well, in a seller's market that's not terribly successful approach.

Mike:

So one of the things that we were talking to Katie Bruner on the SkyView team in prep for this, and she says many advisors, would be buyers really haven't thought much through their strategy, what kind of buyer are they going to be? How are they going to operate in the marketplace? Like, are they going to be opportunistic? Are they going to be looking to just going to seize on any deal? Kind of a shark in the water looking for something? Are they going to be willing to be competitive when they come to the deal? Are they going to go toe to toe with other...

Mike:

Have they thought through that process? Because I think for most and you guys know better than me, and many buyers had never done this before. So this is the very first time they're doing it. So they haven't thought through the process. Like, what's it going to be like when you're suddenly in the marketplace? And you've made a decision? I'm willing to spend a million dollars to buy another practice. What's the world going to be like for you? How do you advise advisors on that approach? How they should go to market and carry themselves?

Kara:

Well, they need to for sure present themselves as potential collaborators rather than "I'm going to take over your business, I'm going to write you a big fat check. And then it's my way or the highway."

Aaron:

I'd agree with Kara, that's a huge issue. The other issue or the other topic I think advisors should focus on is understanding their own identity as a practice.

Kara:

For sure.

Aaron:

The more they understand their own practice metrics, their year over year growth rates and the types of clients they're working with, and they can demonstrate what that identity is. I think it's much easier for them to communicate to sellers and find that potential fit. There still is some matchmaking component to this, a buyer and a seller need to appreciate each other and have some professional respect. I don't think they need to have parallel businesses or identical businesses in any way.

Aaron:

But I think a strong buyer knows what their practice is confident in the performance of the practice, and is interested in sharing that message with a seller. And that message and that excitement that a buyer conveys about their own practice and the confidence in their ability to run their own practice, goes a long way in convincing that seller that you have the chops and you have the wherewithal to run that practice, and put this transaction together.

Mike:

I really like that advice and guidance. What we're really starting to dive into here is having a good value proposition. That too often, as we were talking about in prep, new buyers have a weak or no value proposition that they're presenting to the seller. They're just kind of going in, "Hey, I want to buy your business. You're this size, I'm this size. We both live in Austin, you're in the north side, I'm on the west side, whatever. Seems like a good match made in heaven. You're 65. I'm 45." All that type of stuff.

Mike:

So what are some of the other things that maybe you want to make sure you include in your value proposition? Because you're going to be walking in and there is going to be a bit of a pitch, if you will. So what are some of the things you want to make sure you check off when you're talking to that seller?

Kara:

Yeah, some of the pitches that really don't work well are and they get used so often are, I have an open office. I got an extra office back there, and you could fill it, and that's just not compelling. Or I have capacity. Or we've got some staff that just don't have enough work. Or I can accommodate your service model being very deferential. But it's not something that I do right now.

Kara:

And the one that we hear quite a bit is "I'm with Acme Broker Dealer." Because whoever is mixing the Kool Aid at these broker dealers, deserves an Oscar because a lot of these advisors walk around they're in a cult. And they truly think that, because I'm with this broker dealer, people are going to flock to my door. And they love their broker dealer. And that's terrific, but they're also competing with their broker dealers recruiting department.

Kara:

So value propositions that are more compelling have to do with growth and infrastructure and a well developed asset gathering process. Sellers love to hitch their wagon to a buyer that's growing. So you can say "We're experiencing double digit growth over the last five years." Or "We have perfected and developed a machine to gather assets. And we can help you do this too." Even if the advisor wants to depart the industry in a year or two, they're very attracted to businesses that are on the way up.

Scott:

And Mike, with our investment banking process, and this gets into a little more of the Feng shui, Phil Jackson. But also you need them really think and put yourself in the place of the seller. If you're a financial adviser, you've built a practice over a number of years and a lot of times decades. Place yourself in their position. And it really helps me when we're talking to investment banking clients to put myself in the same position selling SkyView. And it's like, "I don't want to do this, unless you do all this."

Scott:

And then it really helps us on the investment banking side and prospective buyers, to better place yourself and be empathetic to that seller saying like, "Hey, unless all these things are true, I worked hard for the last four years to build this. I don't want to do anything." So we ask a lot of questions about how did you build your practice? What do you like doing still with your practice? And in the event, you decide on a liquidity event what are your plans for after that?

Scott:

And I can tell you help buyers about the sellers and talk through understanding how they got to where they are today. And where they want to go tomorrow. It's extremely important because that identity kind of crisis or cliff that they of "Well, who am I now? Now that I'm not Don Johnson, wealth management, Miami. Who is Don Johnson?" And that's a big question to answer and protecting the legacy of that advisor and his or her identity going forward.

Scott:

And I can tell you the most successful dental practice roll up in the country. None of us have ever heard their name because they leave the name of the dentist on the door who founded it. Little things like this are extremely important to sellers. Like someone came in and said "Hey Scott, we're going to offer you and your team a billion bucks to walk away." I'd find the key. But if they said "We're going to change the name of SkyView to BasementView." Well let's talk about that. These are little nuances that make a big difference. Ask a lot of questions, listen, and learn.

Mike:

I love that approach, Scott. Because these people, it is a relationship based business. We've talked about that. Everybody knows that. But sometimes we just say that offhand, we don't think about it in depth as much as we should. That these advisors have spent their whole life, their whole career building relationships with their clients, building relationships with referral partners and others. And to have somebody else take over that baby. It's an emotional thing right, Aaron?

Aaron:

Well, the last piece I was going to say, to follow up on Scott's point is the buyer, you have to have a realistic goal and vision for what you want to do with it. We hear a lot of buyers that say, "Well, I'm $200 million now. And I'm going to get to a billion by February." Well, that isn't realistic, but having a realistic goal for where your practice wants to be. And then incorporating that outgoing advisor's message into your goals. And understanding what's important to them, really goes a long way in building that trust and building the relationship with the seller.

Scott:

And I'd say the seller doesn't want to hear that. So if they're selling you a $200 million practice, and the buyer goes in, "Well I'm going to be a billion dollar advisor the next two years, three years." You're still not addressing the seller's legacy interests and seller's identity concerns going forward. But if they're going in and saying, "Here's how you're part of a larger legacy, if you decide to join the momentum that we have here."

Mike:

Yeah. Let's talk a little bit about packaging that pitch. So we talked a little bit like what should be in the pitch, but I think maybe some who are hearing this are going, "Okay, I'm going to go sit down, we're going to get on the phone or Zoom with a seller. And I'm just going to rattle this stuff off. And it's just going to work. I'm going to smooth talk it. I'm going to tell you why I'm awesome. I want to buy your business how I'm going to take good care of your clients how we're going to continue the culture of your firm."

Mike:

But chances are that decision to sell the business is not going to be made on that first phone call or over a quick chat right there is going there needs to be some package, if you will, some presentation, or a pitch book, delivered so that the prospective seller can consume the information and digest it probably over several weeks, if not months, to kind of... It's a big decision. What are some challenges that you see, when somebody comes to the pitch presentation or pitch book, however you want to describe it?

Aaron:

The number one mistake I see buyers make is they ask the seller for information right out of the gate. And so they don't ever take the time to build trust and rapport with that particular seller. And what we've designed was this buyer pitch book, if you will. The idea that a buyer can present their information and share information, the more information a buyer shares about their business and their enterprise, the more information they're going to receive from the seller. And that's where they can get that important due diligence done and identify if it's the right practice for them to buy. And build that rapport that's going to create a strong bond between buyer and seller as they work through this process.

Scott:

If you look at our investment banking process, that's really the third or fourth step in the process. First it's engaging the seller about interest and having a conversation. Number two, if you're an active buyer, you better have a template NDA ready to go that protects that seller from sharing any information with you and get that signed and executed up front.

Scott:

And then as a buyer, you better be prepared with the virtual data room to share your information prior to ever suggesting that the seller share any of their information with you before we move forward. So asking for data dealt from sellers is not going to work without an NDA. And then you need a pitch book. And at Apple, we can help with templated NDAs and pitch books that really helped create a more uniform experience across the industry for sellers.

Scott:

Because some advisors have a pitch book that's 80 pages that you don't need. Others have a link to their website. We're trying to create a little bit more standardization, that there's a pitch book available that's templated that you populate that has a rather cursory information about least that facilitates you moving forward. And we have two different versions of a buyer template and a buyer pitch book. For as that conversation progresses, and along each step, an Apple helps you generate those.

Mike:

So Kara, in that pitch book, what are some of the core elements that should be there. Sections if you will, chapters of the pitch book that an advisor should have.

Kara:

So some of the obvious ones are employee bios, and credentials, the history of the business of course. But then it's really important to address the goals of the business. Not just like was previously stated, "We're going to get to a billion by February." And we hear that so often. But to say, "Five years ago, we had a goal to increase the number of G2 clients. And this is where we started, here's where we are." Now, this is showing the seller that we're an organized business, we're not passive, we're not fly by the seat of the pants, we create a goal, we create a strategy to achieve that goal and we deliver on it and we track it.

Kara:

And so those are great things, those KPIs, are good things to have in a pitch book. A pitch book is always based on a valuation, a third party valuation, because we are gentlemen, in an industry where some of our colleagues are prone to exaggeration. And having a third party valuation says that I really do have 100 million AUM.

Kara:

Because I know Aaron and Scott have talked to a lot of advisors, and the first conversation is "My AUM is 150 million." And then the second conversation it's down to 120. And by the time you get the valuation, it's even a little lower. So this brings a little truth and objectivity to the introduction. And then pre-qualifying for financing, demonstrates that you have a strategy, a size strategy, and that you are credit worthy, and financially prepared to enter into this type of activity. Because it just wastes everybody's time if it's a shot in the dark.

Mike:

I like that you bring that up. And that's something that you highly recommend is included, is that the pre-qualified for financing component. Because we kicked this webinar off with talking about like there are lots of would be buyers out there. But Scott quickly shrunk the population down from 50 to maybe four or five who are actually qualified. And there is a legitimate mechanism through SkyView to prove that you're a qualified buyer. That you're not just a would love to buy if the opportunity was right. And I could do it without too much work. Like "No, no, no, I've gone through the effort of making sure that here I am, I'm ready to buy if you're ready to sell." I love that is part of the recommendation there.

Kara:

Mike, I think that the buyer should really look at this, like they're going in and meeting a new client for the first time. They're making an impression for their clients all the time about what's the wherewithal of our firm, how can we provide you with advice, and what kind of services are we going to demonstrate for you over the time to commit to this relationship? And that's what a lot of advisors, I do think, forget when they're speaking with sellers/ because it's more about the technical transactions and the money.

Kara:

And at the end of the day, what they really have to do is demonstrate to the seller, "Hey, we're going to take the same care and quality of work that you've done for your clients for the last 35 years. And now we're going to bring it to our side. So let's talk about all these metrics, let's talk about what that client experience is. And let's talk about how we want to improve our services, and the things that we aspire to do each year to work on our craft." And if they think about that, and they continue that messaging, that's going to go a really long way in engaging these sellers and getting the sellers excited about your firm, which helps them commit to selling and in putting this all together.

Mike:

I think that's really solid advice. Because it does work. You've been through that presentation process before. And so if you just change like, "Hey, I'm pitching a different type of value prop to a different type of individual or team of individuals. But I have been through this before." How would I go about this if this was a client? That's a really, really strong recommendation there.

Mike:

Speaking of money, as we're just going to wrap it up. The pre-qualification question, let's talk about pricing. There's all sorts of information out there on how much should you pay to acquire a business. We see all these different multiples and all these different price things and all these things to consider. But until you're in it, and you're ready to actually make an offer to buy the business it's not real. It's just kind of... And I suspect you have a lot of advisors who have to be told that some of their assumptions were a little off. So what are some of the assumptions that you see when it comes to pricing that may need to be readjusted here?

Scott:

Yeah first of all, I know we get a lot of hate mail in the industry, which I don't fully understand by the way. There's other reasons why I could get it. But I'm of the belief and this also makes my partners cringe a bit that, practices as they are valued today in a very antiquated, multiple on revenue are exceptionally undervalued where they sit now. And we can talk through why we think that's true. But most importantly, if there's ever been access to capital or liquidity in this marketplace. So valuations are always constrained by the amount of buyer equity that the buyer could provide or a seller note.

Scott:

So essentially, you're trying to sell your home and looking for cash or a contract for deed. With the injection of capital starting with Live Oak Bank in 2013, SkyView coming in more recently, 2017 with Conventional, but also with all the PE participants. In any marketplace and I don't think that the RA marketplace is any different. If you inject liquidity into a marketplace prices rise, we saw what happened in '08 when you take away liquidity. Prices implode.

Scott:

So as more liquidity is coming to market, we're seeing the ability for buyers to pay a higher multiple on practices. And if you look at these practices, our banks are not declining these transactions. So if you think they're overvalued, but close the 80% of our deals are done without any buyer equity. Why? These practices cashflow extremely well, average EBOC, earnings before owners comp, is at 48%. That's a lot of cash available for debt service.

Scott:

So if you're out bargain hunting, the best of luck to you, you may find that our most successful of what we call serial acquirers are not paying at 2.5 times revenue. They're looking at a more sophisticated approach on a multiple on EBITDA, and that multiple on revenue probably works out to four plus, four to six. And that transaction is still amenable to bank buyer, especially to seller. So if you want to start acquiring change your philosophy around what you think practices are worth. Because the prevailing content or intellectual thought capital out there is being disseminated by PE which wants to tell you, you're overvalued. Why? Because they're a buyer.

Scott:

And has PE ever entered any market historically and right and roll it up when the underlying asset was overvalued? No, it's strategic. These practices are undervalued where they are today. So be happy that where you're owning the practice is worth more and yes to buy is going to cost more than you expect to be successful. Acquiring more than one-off practice that just isn't aware of the new pricing.

Kara:

As Scott shared with a lot of our presentations is buyers are doing these practices are acquiring these practices, because you can acquire a large chunk of clients at a time. It's much more efficient to their practice than if you're acquiring one or two referrals through your business. So the buyer has to look at what's the potential for this practice? How can I grow it? Because at the end of the day, you're not buying these to just necessarily put them on autopilot and let them maintain, you're buying these to fast forward these client relationships, expand your referral network, identify opportunities within that practice, whether it's generation two, or generation three.

Kara:

And so when it comes down to the fine tuning of the price, I think if you look at these where especially it's a strong buyer and seller fit, you can certainly increase the multiples significantly, because there's a lot of upside growth potential. And so that's what these buyers need to understand too. Is that you have to really look at all the factors that go into that particular valuation that it stands today. And what does this deal do for my enterprise value, 10, 15, 20 years down the road.

Kara:

And the last piece I say, is one of the best ways to understand what you're buying is understand what you currently own. And that's where we've said to our clients across the country at great length is, "Get a valuation, get a really good, detailed valuation and understand all the drivers and the metrics that quantify your price." Because that's going to help you assess these opportunities that are out there in the marketplace. And there are a lot of opportunities in the marketplace. So the better they understand it, the more they're going to identify these really good practices to buy.

Aaron:

These multiples continue to trend upwards. And we're in a unique position where we can look at multiples for loans that have been funded over the last couple of months or the last year. But the three of us, Scott, Aaron and I are working on deals that are a little further upstream. So we've got a crystal ball into what the multiples are trending towards for mid to late 2021. And it's not a buy low, sell high sort of situation. But we are in a good position to provide guidance to say "That's too much. That's enough. That's a bargain." We've got the expertise to evaluate that. We're just in a unique position to be able to see the past and the future from one chair.

Mike:

Well, I think this is a great way to wrap it up with the, to borrow the phrase from a lot of the self help books out there, an abundance mindset right here in 2021. We see a lot of activity kind of growing right out of 2020. You continue to see deal flow increase. And as you said, like there's a lot of competition out there for these practices. So come ready to play. And so make sure you reach out to the team at SkyView by visiting SkyView.com. Click that pre-qualify, get pre-qualified button there or reach out info@SkyView.com or give you guys a call. This has been wonderful. Thank you, everybody for attending.

Aaron:

Right. Thank you. Appreciate it always.

Kara:

Thank you.

Mike:

All right, and thank you everybody who attended. If you want to listen to an episode of this in podcast version, again, check it out on Apple podcast, Spotify, Stitcher, wherever you like to get your podcasts. Jam on and of course, this will be up if you want to watch it again, up on the SkyView site. SkyView.com/educate. And Russell posted a YouTube I saw, so that's good stuff. You can find this everywhere. All right. Thank you everyone. Have a good day.

Scott:

Take care.

Aaron:

Thanks.

Mike:

Thank you very much for listening to this episode of the Advisor Financing Forum podcast. It's always a pleasure to have you with us. Make sure you subscribe to the show on your favorite podcast platform or YouTube because we've got a ton of great stuff planned for you. Huge thanks to Scott, Aaron and Kara as well they were fantastic. Before we say goodbye, please feel free to reach out with your questions or suggestions for guests or topics for the show by hitting SkyView up on LinkedIn, Twitter, Facebook or Instagram or shoot us an email at podcast@SkyView.com. And if you want to learn more about your financing options, simply call 866-567-6282 or email info@SkyView.com. Lastly, make sure you're wearing your mask, keeping your distance and being nice to each other. Okay, we will see you next time on the Advisor Financing Forum Podcast. See you, bye.

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