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Factors for Capturing Higher Multiples Near Closing

In today’s ultra-competitive landscape for acquiring wealth management practices, sellers should consider several factors to ensure that they receive what they deserve for the enterprise built over decades.

There has been a tremendous amount of education around creating a practice that commands higher valuations, such as advisory fees, multi-generational planning, beneficiary planning, etc., yet there are other factors that sellers should be cognizant of as they make one of the most significant financial decisions of their career.

Buyer Optionality

Competition is beneficial in any market. You may have a junior advisor who you would like to purchase your practice, yet savvy buyers must ensure they are capturing a purchase price at current market multiples.

Sellers do not need to exclude junior succession advisors from their buyer search process, but they should certainly execute a well-defined outside buyer search procedure. Several wealth management industry-specific M&A consultants are well-versed in conducting a thorough search for the appropriate buyer.

In the event that the seller still wishes to sell to his or her predetermined successor after a search process and negotiation, the buyer and seller can proceed to close with the comfort that a fair market price was cultivated from competing offers.

Bank Financing

The amount of liquidity in any market causes boats to rise or fall. As a result of the recent introduction of bank financing, our firm has already seen multiples increase. Consider an example: Seller-only financing is akin to selling your house with a contract for deed. Whereas utilizing bank financing is more analogous to purchasing a home with a thirty-year term mortgage. Clearly, the latter allows buyers to afford a much larger purchase price.

Today's sellers must confirm that their prospective buyers can access bank financing. Access to bank financing is driven by creditworthiness and preparedness to purchase and scale both practices. Bank underwriters will question whether the prospective buyer has the people, infrastructure, and processes to manage both practices successfully.

Transaction Representation

Many advisors attempt to complete a “for sale by owner” sale of their wealth management practice. In other cases, selling advisors utilize an M&A consultant. Using an M&A consultant to assist in the sale of your practice can be advantageous for several reasons.

First, an M&A consultant will ascertain a fair market price based on multiple factors; however, the buyer and seller are not bound to the valuation. Instead, a third-party valuation provides a starting point for the buyer and seller to initiate negotiations around a fair purchase price.

Second, M&A consultants have multiple resources for searching for the most suitable buyer. Sellers often cite that finding the right buyer is about a “cultural fit.” Yet, we find that many advisors can provide a culture that accommodates the seller’s needs in addition to an attractive purchase price.

Finally, buyers and sellers who enter the financing process without an M&A consultant are sometimes greeted with less enthusiasm from lenders. M&A consultants create deal structures that are eligible for bank financing and very organized. Transactions that lack a consultant may require bankers to assist in deal structure and other M&A activities that bankers lack the requisite time to execute; do not be surprised if bankers are less enthusiastic about your applicants if you approach them with a “for sale by owner” transaction.

In summary, the multiples received by one seller relative to another are driven by the implementation of sound business practices by the seller over the last three to five years; however, sellers can command increased enterprise value by implementing the factors above, near closing, to fully appreciate the purchase price that they have worked hard to enjoy at retirement.

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