00:00:06.000 –> 00:00:18.000
Good afternoon, everyone. David Grau Junior, President of Succession Resource Group here, welcoming you to our session today. As you can hopefully see on screen titled how to get PE value

00:00:18.000 –> 00:00:39.000
With or without PE obviously getting PE value from PE is much easier, but we want to certainly unpack what’s happening out there right now, private equity, private equity backed aggregators, but also how those values, terms, deals in general compare to internal succession or external. Basically, by the time we’re done here today.

00:00:39.000 –> 00:00:57.000
Either through the content or your questions, hopefully through both, we’ve been able to plant the seed. Get you a little bit better educated on your options because the world of M&A, I’m not going to say it was ever simple, but by comparison, I look back 10 years compared to where we are today

00:00:57.000 –> 00:01:05.000
And it is exponentially more complicated. And so we want to try to make sure that, especially if you are contemplating

00:01:05.000 –> 00:01:11.000
selling and might even redefine what a seller is a bit today, putting together as a team

00:01:11.000 –> 00:01:17.000
If you’re contemplating selling in the next, I don’t know, 12 months, 5, 10 years.

00:01:17.000 –> 00:01:20.000
your options are

00:01:20.000 –> 00:01:27.000
Are what you want them to be, right? If you call us and say, I want to be done in 12 months, we can help you. If you say, I want to be done in 12 years.

00:01:27.000 –> 00:01:42.000
We can also help you, and you’ll have more and different options. So there is no wrong answer necessarily unless it’s not congruent with the outcome that you’re driving towards. That’s what we ultimately want to drive towards today in our session. So we will make sure we carve out time to say we

00:01:42.000 –> 00:01:48.000
Collectively, you may carve out time for some Q&A towards the end, in case there are questions that come up.

00:01:48.000 –> 00:02:02.000
There was a Q&A panel, and if you are good about using it, I promise I would be good about watching it, and we’ll try to maybe even answer those questions organically as they come in. That way it’s a little more topical for the portion of the presentation that I’m on, and I do have the slide deck up that I’ll share with you

00:02:02.000 –> 00:02:11.000
If you want a copy of that slide deck, our team will be reaching out to you after the webinar here today. So just let them know you’d like a copy of that deck. It is available.

00:02:11.000 –> 00:02:24.000
We didn’t intentionally try to build a little bit more content into some of the slides so that 6, 12 months from now, you could look at it and with a little bit of background, have it still be useful to you because not all just pretty pictures and diagrams.

00:02:24.000 –> 00:02:37.000
Beyond that, if you would like a copy of the recording session is being recorded. We record all of these, and we’ll send that out to you, I believe, automatically. That should come probably tomorrow. If you are registered and not attending

00:02:37.000 –> 00:02:47.000
you’ll know when you receive the email. You’re not here. And if you are registered and attended and you want to rewatch it, rewatch any portion of it, share it with somebody you know that needs to hear this message, feel free

00:02:47.000 –> 00:02:58.000
And last but not least, we’re not going to bury you with a bunch of poll questions here today, but I’m going to start out with one at the very beginning that’ll have our moderator here put up.

00:02:58.000 –> 00:03:01.000
It just frankly helps us dial in the content

00:03:01.000 –> 00:03:06.000
I’m pretty good doing some of the stuff on the fly, but certainly for future sessions that we have coming up

00:03:06.000 –> 00:03:17.000
And also make sure we can get you the best and most relevant content. We’ve got a lot of articles, white papers, resources, even sort of interactive quizzes that might be useful to you.

00:03:17.000 –> 00:03:29.000
But only if we know where you land on these things. So you’ll see the quick poll question that’s up there. When you’re done answering it, obviously we’ll close it out, but it will not inhibit us from progressing through the rest of today’s session because

00:03:29.000 –> 00:03:36.000
I’ve got a good 40-45 minutes for the content, and then, like I said, I wanted to make sure we carved out time for your questions.

00:03:36.000 –> 00:03:37.000
So

00:03:37.000 –> 00:03:44.000
Quick intro, who’s SRG? Hopefully you figure that out before registering, but if you didn’t, I appreciate you

00:03:44.000 –> 00:03:54.000
picking up play and joining us here today. And I do know there was a bunch of names on here that we, I have talked to in the past. Some of you we’ve actually had the pleasure of working with

00:03:54.000 –> 00:04:08.000
But not on this particular topic, so still happy to have you join us. In terms of SRG, we’re a consulting firm. We’re headquartered in Portland, Oregon. We focus and specialize on mergers and acquisitions succession planning, valuations

00:04:08.000 –> 00:04:11.000
Or independent financial advisors.

00:04:11.000 –> 00:04:13.000
That’s it

00:04:13.000 –> 00:04:24.000
But to be fair, there’s still a lot of room between those field goal posts, so you’ll see things on screen here that I’ll point out that you might look at and think, well, that’s interesting. He said mergers and acquisitions and succession.

00:04:24.000 –> 00:04:28.000
But he has listed here employment agreements or compensation plan design

00:04:28.000 –> 00:04:45.000
Well, we do those other elements because they’re sort of tangentially related to the work that we do around succession planning. I think of the work that Parker and his team does here on our transaction advisory, where they do internal succession planning

00:04:45.000 –> 00:04:53.000
For the longest time, folks would show up and they’d have a great team, great business, but the compensation, they would sort of own it. They didn’t love it.

00:04:53.000 –> 00:05:10.000
It made the succession planning work more difficult because of how that it was constructed and it’s kind of an old legacy model. So we’ve been doing a lot more compensation research for folks. We have a compensation report that we generate annually for a lot of our clients, as well as just developing compensation models for true

00:05:10.000 –> 00:05:23.000
themes, ensembles, and that’s not easy. It’s certainly not fun, but it’s something that we do a lot of. The other one is things like entity structuring and maintenance, right? Well, why would I do that to law firms? The problem is the law firms

00:05:23.000 –> 00:05:33.000
They’re great at drafting, which you know to ask for. The reason why we do things like entity related work is because it directly impacts your ability to

00:05:33.000 –> 00:05:43.000
you get the right steal from private equity, private equity backed aggregator to really optimize internal succession to get a PE like value from your internal team

00:05:43.000 –> 00:05:51.000
You need the right entity structure, you need the right entity and governance documents. So anyway, long story short, you can see what we do on screen here.

00:05:51.000 –> 00:06:03.000
We tell folks we know a lot about a little. You are our target clients. You are the only folks that we serve. And really, if it impacts the value of your enterprise, your team, then that’s what we do.

00:06:03.000 –> 00:06:12.000
Why is this conversation happening now, right? It’s kind of funny because if you go back and if you aggregated all the trade publications and the articles

00:06:12.000 –> 00:06:17.000
Around private equity. I mean, just as a genre, right? Not as an investment strategy for your clients.

00:06:17.000 –> 00:06:24.000
But specifically as an investment vehicle, succession tool for you as owners, founders

00:06:24.000 –> 00:06:26.000
You think

00:06:26.000 –> 00:06:33.000
Even 4 or 5 years ago, you’d be hard-pressed to find more than one or two articles the whole year

00:06:33.000 –> 00:06:37.000
They talked about either private equity making a direct investment in a firm

00:06:37.000 –> 00:06:43.000
or a private equity backed aggregator, then going downstream and making acquisitions it happens.

00:06:43.000 –> 00:06:55.000
But it wasn’t the norm, and it was reserved… certainly private equity direct investment was very large shop. Billions of AUM. Before that was even on the table.

00:06:55.000 –> 00:07:07.000
And not because the AUM, but because of the internal factors of developing a team and a firm that’s no longer sort of owner-operated. Let’s just takes some size and scale. And so

00:07:07.000 –> 00:07:16.000
You go back a couple years ago, it was only the biggest firms taking direct private equity investment, and it was really still only the industry’s biggest firms that the private equity backed aggregators

00:07:16.000 –> 00:07:28.000
We’re then seriously looking to acquire because again, they did not want to buy your job. They wanted to buy your firm or make an investment, and then go do the next deal. You keep running and operating it.

00:07:28.000 –> 00:07:36.000
So that, again, goes back to needing some size and scale. It was a pretty rare occurrence. Now you start, do a quick Google search

00:07:36.000 –> 00:07:43.000
I realized I probably just dated myself do a clause or chat GPT search a query

00:07:43.000 –> 00:07:50.000
around private equity investments and the activity in it, and in just the last year or two, I mean

00:07:50.000 –> 00:08:03.000
It’s an astounding amount of the deals. You can see by what I have on the screen for you here. So astounded and we’re seeing this, right? I mean, if you go back to transaction data, you’ll see here on the far right

00:08:03.000 –> 00:08:05.000
It’s 80% figure.

00:08:05.000 –> 00:08:12.000
You’re looking at 80% of deals in 2025 involve a private equity backed aggregator

00:08:12.000 –> 00:08:22.000
And I see the source on this one’s Fidelity, but we’re seeing it if you look at publications from De Vo, Echelon, Advisory Growth Strategies, you know any of these other

00:08:22.000 –> 00:08:23.000
some

00:08:23.000 –> 00:08:25.000
Private equity

00:08:25.000 –> 00:08:33.000
Not equity firms, but firms that deal a lot with private equity and have, you know, some larger RIA clients. We’re all seeing it.

00:08:33.000 –> 00:08:39.000
The rub is, though, and I’ll throw the substat up here for you or anecdote

00:08:39.000 –> 00:08:43.000
That’s measured by assets under management.

00:08:43.000 –> 00:08:49.000
If you go look at the number of deals done, I mean, I’m rounding up

00:08:49.000 –> 00:08:54.000
that it represents maybe 5% of the total transaction volume.

00:08:54.000 –> 00:09:10.000
And now that I told you that, you’d think, oh, well, that’s much to do about nothing. It is and it isn’t, right? So they are still doing big deals. I mean, for every one of these private equity investments or even the private equity aggregators in their acquisitions that are moving downstream

00:09:10.000 –> 00:09:23.000
But most of the firms that are buying on the smaller side still have hundreds of millions of AUM. It might not be at a billion yet, but they’re getting close. And many of them still have a billion, 2 billion or more.

00:09:23.000 –> 00:09:32.000
So if you count it by AUM, yes, there are huge sides of the market and it’s a fair way. I know why they represent it.

00:09:32.000 –> 00:09:36.000
In this way, 80% of deals in 2025 were involved private equity.

00:09:36.000 –> 00:09:45.000
That sounds like basically every deal had private equity involved. And if you actually sat and went to a conference, talked to advisors that had done a deal recently

00:09:45.000 –> 00:09:56.000
you go around and you keep talking to people, you keep talking to people, you’d be hard-pressed to find somebody who actually did a deal with private equity, because, again, the vast majority of advisors, RIAs

00:09:56.000 –> 00:10:10.000
500 million, maybe a billion, but the vast majority are under a billion in AUM. And those deals are bought and sold regularly. You can see here the number of transactions that are reported

00:10:10.000 –> 00:10:25.000
You’ve got stuff from, like, the public available sources, which is what, like, a De Vo, Echelon, Fidelity is reporting on, you know, with the RIA and the successor filings. But I mean, we have 171 transactions last year that we facilitated, and

00:10:25.000 –> 00:10:28.000
I mean, almost none of those required

00:10:28.000 –> 00:10:36.000
By private equity or private equity-backed aggregators. Some of them for sure, but not a lot of them. So it’s just worth considering

00:10:36.000 –> 00:10:38.000
But it’s enough to get our attention, right?

00:10:38.000 –> 00:10:45.000
We think of the amount of advisors that are going to be retiring. The multiples that we’re seeing and talking about now

00:10:45.000 –> 00:11:00.000
It’s tough as a founder-owner to not consider it. But what I want to try to do today is make sure you know there are other paths. Private equity and private equity backed aggregators can be a great tool and resource, depending on your timeline and your goals. So I do want to start there.

00:11:00.000 –> 00:11:10.000
What internal succession is what the overwhelming majority of advisors tell us that they want. And it’s not just us. If you go back to some of the Cerule studies over the years

00:11:10.000 –> 00:11:18.000
This isn’t like an interesting anecdote. It’s been pretty consistent over multiple years. Most owners want to sell to their team.

00:11:18.000 –> 00:11:24.000
But they also want the private equity back number that they got in an offer via email

00:11:24.000 –> 00:11:28.000
A week a month ago, you know whenever it was.

00:11:28.000 –> 00:11:31.000
We can’t have both or can we?

00:11:31.000 –> 00:11:42.000
You can do it right, you might be able to get close. So that’s what I want to spend time on today, is understanding all of your options, not because we have a pony in this race, frankly, we would love to just represent you

00:11:42.000 –> 00:11:53.000
and take you out to market, and make sure if you’ve got one or two offers in hand, let’s get a few more, and let’s make sure we improve these offers, because the 1st offer is literally never

00:11:53.000 –> 00:11:54.000
best offer

00:11:54.000 –> 00:12:01.000
And when you’re dealing with private equity and private equity backed aggregators, these are some of the best buyers in the industry. And when I say best, I mean

00:12:01.000 –> 00:12:03.000
They know what they’re doing.

00:12:03.000 –> 00:12:15.000
They can spin a good yarn and not in a bad way, right? But they know how to highlight the things that should be highlighted and they know how to downplay the things that shouldn’t be. So private equity is not one that you want to go it alone on

00:12:15.000 –> 00:12:30.000
But internal succession can work peer-to-peer deals could work. And I want to make sure we can evaluate those collectively equally. So your options with private equity just to set the stage. I know this might seem a little too rudimentary, but I hear the term sort of used interchangeably, and they are different.

00:12:30.000 –> 00:12:41.000
So if you’re thinking private equity might be of interest, right, to at least kick the tires on, the first step is to know who we’re dealing with or who we want to deal with.

00:12:41.000 –> 00:12:48.000
Are we going to go direct private equity or a private equity backed aggregator, right? You think of like

00:12:48.000 –> 00:12:56.000
Mercer, Mariner, Veschen, I mean, there’s a whole beacon Point, there’s a bunch of these really successful large firms

00:12:56.000 –> 00:13:02.000
That they’ve taken private equity and now putting that capital to work and as a result

00:13:02.000 –> 00:13:16.000
Private equity makes an investment in very large successful RIAs, but those RIAs can then go downstream to the point where we’re negotiating offers sometimes on firms with two or 300 million in AUM. That never happened

00:13:16.000 –> 00:13:17.000
10 years ago.

00:13:17.000 –> 00:13:21.000
Even five years ago, it happened occasionally, but the offers

00:13:21.000 –> 00:13:24.000
For the smaller firms.

00:13:24.000 –> 00:13:27.000
Borderline insulting.

00:13:27.000 –> 00:13:41.000
Right? They weren’t bad. But they weren’t good either. And as the private equity backed aggregators have become a little more prolific. They’ve got more deals done. They’re moving downstream. And we’re honestly, we’re seeing some

00:13:41.000 –> 00:13:54.000
Pretty darn good deals. I had one come across my desk yesterday, second round of offers and it’s two and a half million GDC. It’s affiliated with a broker dealer, but it’s still mostly fees

00:13:54.000 –> 00:13:59.000
And we’re at almost 10 million dollars.

00:13:59.000 –> 00:14:02.000
on an offer and not on crazy terms.

00:14:02.000 –> 00:14:05.000
From a private equity-backed aggregator

00:14:05.000 –> 00:14:15.000
So, interesting to understand the difference here, right? You got direct private equity investment, but that is going to require size. I mean, you’ve got to be millions of AUM

00:14:15.000 –> 00:14:18.000
Before that’s viable, right?

00:14:18.000 –> 00:14:24.000
Private equity back aggregators, they’ll certainly do deals with you if you’ve got billions of AUM, don’t get me wrong.

00:14:24.000 –> 00:14:35.000
But really, private equity backed aggregators, they can come down market. I mean, I don’t think I’ve seen anything serious offers below maybe 200 million AUM

00:14:35.000 –> 00:14:50.000
But there’s still a lot of firms that have 200 million AUM or more, and so that’s very viable. My footnote here is that private equity direct investment is not a succession solution at all in any way, shape, or form. In fact, the more you talk about wanting to retire in those meetings

00:14:50.000 –> 00:14:56.000
The worse the offer is probably going to get, because they don’t want you to buy your job, they want to buy your business.

00:14:56.000 –> 00:15:03.000
Now, again, if you’ve got a team in place, that team is already driving growth, that’s less of an issue.

00:15:03.000 –> 00:15:11.000
But for most firms, they’re still owner operator, right? The owner still plays a pretty integral role, especially in the growth.

00:15:11.000 –> 00:15:21.000
can be a solution from a succession perspective. The trouble is they’re still trying to make investments by firms as opposed to buy them, take them over and figure out how to run and operate them.

00:15:21.000 –> 00:15:27.000
So in my earlier example, two and a half million in GDC, $10 million offer

00:15:27.000 –> 00:15:32.000
I know, I mean, we’re a firm of that size. That is an amazing offer.

00:15:32.000 –> 00:15:38.000
And that’s a succession scenario, where the owner’s going to transition out over 12, maybe 24 months

00:15:38.000 –> 00:15:43.000
It doesn’t have a team in place that’s going to necessarily run and operate independent of him.

00:15:43.000 –> 00:15:55.000
That would not be of interest at all to direct private equity investment, but to an aggregator who’s got enough size and scale, they can put that team in place. So they can be an option for succession

00:15:55.000 –> 00:16:00.000
In general, if I’m looking at these two, either one of them

00:16:00.000 –> 00:16:05.000
The ideal scenario is not you sell and retire.

00:16:05.000 –> 00:16:16.000
I mean, you’re going to sell in retire at some point, don’t get me wrong. But the ideal scenario when dealing with private equity specifically is you sell and you continue to run and operate it and grow it.

00:16:16.000 –> 00:16:17.000
So

00:16:17.000 –> 00:16:30.000
Let’s sort of redefine, maybe not redefine, but at least understand more clearly the historical definition of seller versus today’s because it’s a little different. Historically, right, it was pretty simple. And I put it on the left hand side of the screen

00:16:30.000 –> 00:16:45.000
you were probably in your 60s, maybe 70s, when you’re ready to retire, you’d call us. You either had a peer that you’re gonna sell it to your internal team, or we’d go find you a handful of candidates would negotiate the sale.

00:16:45.000 –> 00:16:47.000
But when you’re done

00:16:47.000 –> 00:17:02.000
You pick somebody, you sold the business to them, you land the client safely, and that takes, I say 12 to 18 months. Most of the heavy lifting is done in the first 6, 12. It’s just reinforcement in the last maybe 12 to 18 months.

00:17:02.000 –> 00:17:14.000
And you can see the deal terms are pretty straightforward, 70 to 80% upfront, sometimes more, generally not much less. Balances paid in a year, assuming you had generally 90% retention, and in most cases.

00:17:14.000 –> 00:17:20.000
A couple months from now, you’re still there on a part-time basis supporting the transition so you don’t lose many clients.

00:17:20.000 –> 00:17:22.000
I mean, I think our average retention rate

00:17:22.000 –> 00:17:28.000
On these deals, it’s like 95, 98%. There’s been a few that are a little lower than that, but nobody

00:17:28.000 –> 00:17:39.000
I don’t think we had anybody last year below 90. It happens on occasion where somebody drops below 90, but it’s pretty rare. It’s one or two per year at most. And last year, there wasn’t any. Values multiples

00:17:39.000 –> 00:17:51.000
In general, they were priced based on revenue, 2.5 to 3.5 times revenue. Pretty consistent, pretty common. Look on the right hand side, little different scenario, kind of your ideal private equity backed seller is starting much earlier.

00:17:51.000 –> 00:17:55.000
And it makes sense, right? If I told you that the old

00:17:55.000 –> 00:17:58.000
Seller, literally and figuratively

00:17:58.000 –> 00:18:13.000
They sold at the end of their career, and then they transitioned the book, they got out of the way, and they retired. The private equity firms, again, they’re making an investment. So they want to get in earlier while you’re still in growth mode running and operating the business, and they’ll buy it from you and pay you to keep running it

00:18:13.000 –> 00:18:23.000
They don’t love buy it from you, and then you exit stage left, and they got to try to figure out how to get the operations streamlined, how to put somebody in here to take care of the clients. They’ll do it on occasion.

00:18:23.000 –> 00:18:30.000
But your ideal PE seller fits more than this probably 50 to 60 year old category, ideally

00:18:30.000 –> 00:18:42.000
You sell today if you need to run and operate it, you’ll see my note there. They generally allocate… that’s not generally every time they allocate 20 to 30%, sometimes it’s 20, 25, maybe 30, but it’s one of those figures

00:18:42.000 –> 00:18:43.000
as the

00:18:43.000 –> 00:18:49.000
allocated compensation for the owners, advisors to continue to run and operate it.

00:18:49.000 –> 00:19:00.000
And then you can see the deal terms, little different. 40% cash upfront, 60% contingent, usually ends up being paid over like four to five years.

00:19:00.000 –> 00:19:10.000
But the multiples are, I mean, they’re not higher necessarily, right? Because you’re talking about 8 to 12 and 8 to 12 is higher than two and a half to three and a half. I get that. But

00:19:10.000 –> 00:19:15.000
It’s 8 to 12 on your earnings as opposed to 2.5 to 3.5% of top line.

00:19:15.000 –> 00:19:18.000
Could be more, could be less, depends on the firm.

00:19:18.000 –> 00:19:20.000
Oftentimes it’s more

00:19:20.000 –> 00:19:23.000
But the terms, right?

00:19:23.000 –> 00:19:34.000
You’re looking at 40% cash upfront, real money that you can deposit in the bank. The other 60 is usually enrolled equity and earn outs that require you to hit sometimes a 10 to 20% growth target

00:19:34.000 –> 00:19:38.000
Which again, if you’re in your 50s or 60s, is not the end of the world.

00:19:38.000 –> 00:19:43.000
When you’re the 60 or 70 year old seller who wants this multiple

00:19:43.000 –> 00:19:49.000
Well, you gotta stay and you have to run it, and you have to grow it over the next four to five years, that may or may not be in the card. So

00:19:49.000 –> 00:19:54.000
Understanding if a PE deal is right for you, that’s certainly one of those components.

00:19:54.000 –> 00:20:06.000
So there’s a note on here, because I told you I’d integrate the Q&A. An anonymous attendee, I appreciate it because you’re right. They don’t want to buy your job. It’s not a bad thing necessarily

00:20:06.000 –> 00:20:20.000
But they’re not looking to continue to go out there and try to get all of these deals done and then figure out how in the world to run them. That’s not their job. But Mark had the question, is that including internal succession transactions

00:20:20.000 –> 00:20:26.000
I’m going to get to the internal stuff here in a moment, actually. And so as we start thinking about the multiples

00:20:26.000 –> 00:20:32.000
This historical seller is not. This one is generally more focused on kind of your peer-to-peer deal

00:20:32.000 –> 00:20:44.000
But in general, most of the internal succession plans, they kind of land in this same range. But internal succession really should be focused more on earnings than it is top-line revenue. But fair question

00:20:44.000 –> 00:20:47.000
So talk about who it’s right for

00:20:47.000 –> 00:20:53.000
4 main variables, and I touched on some of these sort of anecdotally on the last 2 slides. So I’ll move through this quickly.

00:20:53.000 –> 00:21:08.000
But I want to hit on these four, but before I do that, Roger had a question on that last slide, which I’ll just jump back to for the sake of a backdrop here. So, do you target 40% profit, 30% owner’s salary, 30% expenses based on GDC?

00:21:08.000 –> 00:21:09.000
Yeah, I mean

00:21:09.000 –> 00:21:15.000
I wouldn’t necessarily focus on the last two portions. What I would say as far as a profit margin

00:21:15.000 –> 00:21:20.000
And we get this pretty consistently from our valuation team, who’s got a lot of data on this

00:21:20.000 –> 00:21:26.000
30 to 40% profit margin seems to be sort of the sustainable target margin

00:21:26.000 –> 00:21:30.000
For EBITDA, right? So it’s including reasonable compensation for you.

00:21:30.000 –> 00:21:36.000
30 to 40% profit margin, EBITDA is what you should be targeting for a sustainable organization

00:21:36.000 –> 00:21:47.000
And you’re going to vacillate between that, right? Your multiple doesn’t necessarily change a lot, but as you get up into the 35, 40% profitability, you’ll be high-fiving yourself, right? Because it’s good profit margin.

00:21:47.000 –> 00:21:59.000
Problem is usually a 40% profit margin. Your team is down at capacity, you don’t really have any more room for growth, and so you have to go and hire, train, you need a place to put those people, you need a computer, they want a 401k program, right?

00:21:59.000 –> 00:22:04.000
And all of a sudden we go from 40% profit now down to 35 or 30.

00:22:04.000 –> 00:22:17.000
And now we’ve got capacity and we continue to grow, we backfill, we didn’t have to hire anybody, so we go from 30% profitability, which sucked, up to 35, up to 40. You’re gonna vacillate safely in that range. Now, we see firms occasionally higher than that

00:22:17.000 –> 00:22:18.000
Yeah.

00:22:18.000 –> 00:22:24.000
We just had a conversation with one probably two days ago, and it’s

00:22:24.000 –> 00:22:32.000
Two and a half billion AUM, a billion of that is managed money from, I think it’s like 55 to 65 households

00:22:32.000 –> 00:22:37.000
That would be an example where, yes, their profit margin will be a little higher, but not a lot higher.

00:22:37.000 –> 00:22:38.000
Because

00:22:38.000 –> 00:22:43.000
This talent of the people you need to operate a business

00:22:43.000 –> 00:22:59.000
We have 2.5 billion in AUM from 55 to 65 year old households. Like these are not newly minted CFEs. So you’re going to have less people because you’re going to have less clients, but the talent level is going to have to be up there. Means we’re going to pay more for these people

00:22:59.000 –> 00:23:04.000
So 30 to 20% is a pretty safe number to target. But yeah, good question, Roger.

00:23:04.000 –> 00:23:13.000
So much of this stuff on internal succession, private equity backed aggregators, they are focused almost exclusively on your earnings, your EBITDA.

00:23:13.000 –> 00:23:15.000
So

00:23:15.000 –> 00:23:27.000
Let’s hit the next slide here. So there’s four variables that can help you sort of decide. Number one, you’ll see here is practice size. That’s an important factor. If you were sitting here listening today, it’s 7, 800 million AUM

00:23:27.000 –> 00:23:32.000
A, congratulations, that’s still quite an accomplishment to have built.

00:23:32.000 –> 00:23:38.000
Own that, run the lifestyle practice as we affectionately refer to it, because

00:23:38.000 –> 00:23:48.000
It has not got the complexity to it. You can drive, you can be well above that profit margin. It’s not necessarily scalable or sustainable. And you’re certainly not going to get private equity offers that are serious or worth considering

00:23:48.000 –> 00:23:54.000
But you can do very, very well. And you will be able to sell it to one of your peers, and you’ll get a good value.

00:23:54.000 –> 00:24:11.000
Could you get a higher multiple if you invested in building a true enterprise? Sure. But you’re going to take the good with the bad. So practice size matters, right? As we start getting up close to a billion and above a billion, you’re still going to see the multiples start to shift because your buyers are going to shift.

00:24:11.000 –> 00:24:23.000
Timeline has become a really important factor here where again, when we have advisors who are listing because they want to sell and retire, private equity and private equity backed aggregators are probably not our prime target.

00:24:23.000 –> 00:24:28.000
Right, they’re going to view that almost as a distressed sale. It’s not

00:24:28.000 –> 00:24:32.000
But that’s what they’re going to view it as, right? Because now they have to figure out how to staff

00:24:32.000 –> 00:24:33.000
And they don’t deal with that

00:24:33.000 –> 00:24:42.000
They’re making an investment. You sell to one of your peers. They’re not happy you’re getting out of the way, but from a financial perspective, you look at it in the spreadsheets.

00:24:42.000 –> 00:24:50.000
They’re happy you got out of the way, right? They want you to land the clients, they have the capacity, they’ll keep your team. So timeline matters. If you have less than, let’s say.

00:24:50.000 –> 00:24:58.000
3 to 5 years. You’re not looking seriously at internal succession, and you’re really probably shouldn’t be considering

00:24:58.000 –> 00:25:00.000
a murder or private equity.

00:25:00.000 –> 00:25:13.000
If you have more than that 3 to 5 year window, then you start to have some real options. And again, then it comes back to practice size. For instance, big enough, you have enough headcount, maybe it’s internal, maybe it’s private equity. It’s going to depend.

00:25:13.000 –> 00:25:21.000
You’re in buyer universe. I mean, this one sounds obvious, right? But if you’ve got a, I don’t know, 150, 200 million

00:25:21.000 –> 00:25:29.000
But you don’t really have anybody internally that wants to take it over, or that’s of that capability at this point.

00:25:29.000 –> 00:25:36.000
Well, then your pirate universe finds who you’re going to look at for succession, and it ain’t going to be internal.

00:25:36.000 –> 00:25:40.000
And the last one is obviously looking at

00:25:40.000 –> 00:25:45.000
The long-term priorities. What are you trying to get out of this thing, right? And I

00:25:45.000 –> 00:25:58.000
Historically, I felt like it was a little bit of, maybe not a scarlet letter, right? But nobody wanted to say that they wanted to get the highest value. It felt very, I think, disingenuous to say that about selling your practice and your clients

00:25:58.000 –> 00:26:12.000
You can get a good value. You can focus on getting the maximum value while not necessarily selling out and doing a disservice to your clients, especially if you’re sitting here listening today as a fiduciary, you owe it to your clients literally and figuratively.

00:26:12.000 –> 00:26:21.000
But maximizing your value can still be your top priority. For others, it’s fit. Others, it’s maintaining a legacy. Some of it’s flexibility and control.

00:26:21.000 –> 00:26:26.000
It’s gonna be different for each of you. So I do want to unpack that, and I’ll get into that one more later.

00:26:26.000 –> 00:26:29.000
But when you think about the

00:26:29.000 –> 00:26:33.000
Headline multiples, right? The whole focus here is how to get PE value

00:26:33.000 –> 00:26:37.000
with or without PE so let’s talk about those multiples and values.

00:26:37.000 –> 00:26:40.000
Number one, just to set the stage

00:26:40.000 –> 00:26:45.000
Private equity and private equity backed aggregators and their deals are not bad

00:26:45.000 –> 00:26:50.000
Right? You’ll see some talking heads, you know, like us out there saying, well.

00:26:50.000 –> 00:26:59.000
It’s smoke and mirrors, it’s magic beans. It is sometimes, but until it grows a giant beanstalk, you climb up and get the golden goose, well, it could be worth it.

00:26:59.000 –> 00:27:10.000
So let’s unpack it a little bit. What you’ll see often times, and I went to the high end, right? 15x as an earnings multiple is not common, but we definitely have seen it out there.

00:27:10.000 –> 00:27:22.000
But taking you in the high watermark, let’s say a 15 times multiple. In reality, it’s probably closer to like 9 to 11, which is still phenomenal, folks.

00:27:22.000 –> 00:27:26.000
But it’s less than 15, I fully acknowledge. So

00:27:26.000 –> 00:27:30.000
As we did our research for the session, obviously looking at our own

00:27:30.000 –> 00:27:41.000
Content and transaction data. We do these deals all the time and negotiate these offers. But we tried to pull in some outside sources as well just to validate, make sure what we were seeing is consistent. And it is.

00:27:41.000 –> 00:27:54.000
Headline multiple is genuinely not what you end up putting in the bank. It can be in some instances. The point is, the folks that pursue these private equity deals with us or deals with private equity backed aggregators

00:27:54.000 –> 00:27:59.000
They’re willing to take a little bit of a flyer, right? They’re okay taking a little bit of risk.

00:27:59.000 –> 00:28:02.000
Yes, they could get

00:28:02.000 –> 00:28:04.000
Not as much money

00:28:04.000 –> 00:28:11.000
But still a good value and all of their money guarantee, usually within the first like 12 months on a peer-to-peer deal

00:28:11.000 –> 00:28:20.000
But if they want the potential upside, you’re not going to get that in a peer-to-peer deal. So it’s about going in with eyes wide open, right? So you think about the options here.

00:28:20.000 –> 00:28:28.000
Five times sort of inflate the headline. Sometimes artificially, but not always, is cash or close right

00:28:28.000 –> 00:28:38.000
These deals are generally… you’re looking at 40. I’ve seen, we saw one recently as high as 60% cash at close

00:28:38.000 –> 00:28:49.000
But the more cash you have in clothes, the more you start noticing in these term sheets, which can be 8, 12 pages long. There’s some interesting nuances. The one that we saw at 60% cash down

00:28:49.000 –> 00:28:59.000
You… that deal had to get 90% positive consent from clients. Basically, they had to sign a new investment advisory contract to move over to the private equity-backed aggregator

00:28:59.000 –> 00:29:04.000
And if you didn’t hit 90%, they didn’t have to close.

00:29:04.000 –> 00:29:12.000
So picture that you got a good multiple. I mean, it wasn’t a 15 times multiple, but it was still a good multiple and it was 60% cash at close.

00:29:12.000 –> 00:29:24.000
But if you ended up at 85% of your clients that you have talked to about this buyer and they’ve signed a new investment advisory contract and you only hit 80% or 85% and they decide not to close.

00:29:24.000 –> 00:29:32.000
you now go back to your clients and tell them, just kidding. Actually, that deal didn’t work out. I’m pursuing something else.

00:29:32.000 –> 00:29:48.000
It’s not going to be good. So the devil’s in the details in these offers. These are very sophisticated buyers. So you’ve got the cashier clothes, you got equity rollover, which this can be a really interesting component. And it could drive an even higher overall value than the 15 or the 9 to 11.

00:29:48.000 –> 00:29:51.000
Right? If the rolled equity

00:29:51.000 –> 00:29:57.000
ends up, you know, rolling another time, for example, and the firm hits their growth targets

00:29:57.000 –> 00:30:03.000
Sometimes the equity that you get paid with could be worth as much of your actual deal was

00:30:03.000 –> 00:30:17.000
The problem is, the other half of the time it could be worth nothing. There’s not a lot of room between those 2 field goal posts. So you got cash, you got the equity component. You got the earn out. I hate the earn out on your behalf

00:30:17.000 –> 00:30:24.000
But again, if you’re in your 50s, maybe early 60s, and you’re still in growth mode anyway.

00:30:24.000 –> 00:30:36.000
Having a firm like this by you and then you having to hit 10 to 20% compounded annual growth rates over the next four to five years, it might not be easy, especially if the markets don’t help us help you

00:30:36.000 –> 00:30:49.000
But it’s doable. The problem is a lot of the deals we’re negotiating are for visors who are in their early to late 60s and they haven’t been in growth mode in a very long time and they don’t want to be. And they certainly don’t want to have

00:30:49.000 –> 00:30:54.000
Sometimes 30, 40% of their deal tied up on hitting these growth targets

00:30:54.000 –> 00:31:04.000
So anyway, earnouts are a component. And again, if you’re in growth mode anyway, this is not necessarily a negative. This is almost free money for you because you’re doing it regardless.

00:31:04.000 –> 00:31:14.000
it does require you to be involved in these deals, right? You cannot sell the business and walk away. You’ve got to be there, usually for 4 to 5 years. Even that’s kind of the cutoff

00:31:14.000 –> 00:31:19.000
If they hear that, it’s not going to be ideal. They’re looking for somebody who wants to be there

00:31:19.000 –> 00:31:28.000
Especially if they’re gonna pay you with their equity, right? They want everybody on their boat helping grow. They don’t want to pay you with equity, and then you leave, and you’re outside watching, not rowing.

00:31:28.000 –> 00:31:39.000
So there is required involvement, there’s retention and growth targets, and if you go into it with eyes wide open and we can help negotiate these things, you can still get a pretty good deal even from private equity.

00:31:39.000 –> 00:31:46.000
So I see there’s a few more questions that have come in. Let me see if I can hit those real quick, just so that we stay on topic.

00:31:46.000 –> 00:31:54.000
So question from Roger at a firm valuation of 20 million, seems difficult to put together an internal succession as the number is huge

00:31:54.000 –> 00:32:02.000
For younger potential owners. Yeah, you’re not wrong. That’s the… one of the few things most internal successors have in common is they don’t have any money

00:32:02.000 –> 00:32:05.000
So I hear you, Roger.

00:32:05.000 –> 00:32:10.000
So without retaining the risk and doing an owner financing, how can this work?

00:32:10.000 –> 00:32:23.000
Love the question. I’m going to get to it here in a minute when I’ve got a slide to back me up. So I’m going to leave this question here, because I do want to come back to it. But I will tell you, Roger, there is an option. Like, there are solutions here. Seller financing can work

00:32:23.000 –> 00:32:39.000
Then you’re getting paid back with your own money. And that’s not great. So there’s other options. Another question here, what practice size would you say is the smallest where it still makes sense to work with you in exploring a sale? So that depends. I would say in general, probably

00:32:39.000 –> 00:32:50.000
500 million, maybe 400 million can work. And we still have a ton of great options there. Now, again, at that size, are we going to be having a ton of offers from private equity backed firms? No.

00:32:50.000 –> 00:33:02.000
But we do actually know a few that they, especially if you’re in one of their strategic markets or near one of their existing office locations, which is why it’s helpful to have a firm like ours help lead the charge

00:33:02.000 –> 00:33:07.000
We’ve got a good Rolodex of these firms where we can say, like, well, you’re 600 million AUM

00:33:07.000 –> 00:33:17.000
These firms that you’re thinking of don’t have a footprint in your area, and you’re not big enough for them to establish one, so that’s not going to be a good target. They’ll try, but it’s not going to be a good fit.

00:33:17.000 –> 00:33:25.000
These other two firms want to be in your market, or they just opened an office last year in your market, and that would be a great opportunity to consolidate

00:33:25.000 –> 00:33:37.000
So in general, if you’re thinking private equity or private equity backed firms, I’d say probably 500 million is a pretty good cutoff, or you know, maybe 5 million top line fees

00:33:37.000 –> 00:33:46.000
But I mean, even down to 200 million, we can negotiate some halfway decent deals that I mean, you’d look at and think, really, this is

00:33:46.000 –> 00:34:04.000
I would have retired last year if I knew that I could get this number. Thinking of your peer to peer deals, though, I mean, we’re working on deals with 50, 60 million AUN in many cases that get a great value from one of their peers who’s not yet a private equity backed aggregator, but they’ve done a handful of deals enough to know how these things are done

00:34:04.000 –> 00:34:07.000
And they’d love to find a way to partner with you.

00:34:07.000 –> 00:34:24.000
I wouldn’t say science doesn’t matter because, I mean, I just said we can support you and get you a great deal of 50 million AUM. It’s more about knowing what’s your sort of ideal exit is. And if you said, hey, I really want a private equity backed aggregator and I’ve got 20 million AU

00:34:24.000 –> 00:34:33.000
We’re probably not the right solution for you. In fact, nobody would be. But if you’re open to different options, then yeah, even 50 million AUM, we can get you a great outcome.

00:34:33.000 –> 00:34:37.000
Next question here, so what practice already answered that one. Just kidding.

00:34:37.000 –> 00:34:43.000
What would you say is the normal retaining rate and normal expectation for PE or peers

00:34:43.000 –> 00:34:56.000
I mean, it varies, right? So the more aggressive we get on the cash down, the more aggressive we get on the multiple, the more aggressive they get with their terms. Not aggressive, right? But like the more assumptions and expectations there are built into it.

00:34:56.000 –> 00:35:07.000
So if we want to get something in the teens as a multiple, they’re probably going to have at least 10 to 20% growth rate as an expectation over the next four to five years

00:35:07.000 –> 00:35:19.000
And you’re probably gonna have to hit more than 90% retention. The good news is if you’re still there, you’re not going to lose many of these clients, right? You’re still there, you’re still running the firm, you’re keeping your team in place, because they’re not trying to buy your firm and then gut it

00:35:19.000 –> 00:35:34.000
But also know, right, this is private equity we’re dealing with directly or indirectly. They want growth and they want margin expansion and then they want out. So you want to make sure you pick the right partner. But in general, yeah, 90% retention is kind of what most of these firms are targeting

00:35:34.000 –> 00:35:43.000
If you negotiate, we can get the multiple higher or more cash down. Don’t be surprised though if that comes at the expense of like a 95% retention target.

00:35:43.000 –> 00:35:57.000
And then the question is, how is that structured? And the example I gave you with a decent multiple and a 60% cash down, they didn’t even have to close. That’s not very common, but I’ve definitely seen it before.

00:35:57.000 –> 00:36:01.000
Let’s answer the next one here.

00:36:01.000 –> 00:36:04.000
That one’s done.

00:36:04.000 –> 00:36:20.000
This is a little longer. I’ll take this one offline. There’s one here, assuming you’re 15x headline multiple is 15 times EBITDA, which it is, not revenue. So yeah, good clarification. Basically, anytime you see something more than like 4, just assume it’s either EBO

00:36:20.000 –> 00:36:26.000
or EBITDA, right? So earnings before owner’s compensation, that’ll be usually in, like, a 3 to 6 range.

00:36:26.000 –> 00:36:36.000
Or EBITDA, which is all the way at the bottom of the profit and loss statement. And there you’re generally looking at something safely like 8

00:36:36.000 –> 00:36:40.000
On a normal deal and then with some interesting terms, you can get a little higher than that.

00:36:40.000 –> 00:36:48.000
But yeah, 15 times is definitely on EBITDA, which is including reasonable compensation for you as an owner.

00:36:48.000 –> 00:36:57.000
Let’s see, we answered that one. Answered that one, so I think we should be good. But again, if there are any other questions, I’m happy to answer them as we progress. That is the whole point of this.

00:36:57.000 –> 00:37:13.000
So two valuation lenses that I wanted you to make sure we highlight, especially given the questions that we had come in here. So on the multiples of the 15 times I just showed you on the last slide, yes, definitely on EBITDA. And that is the high bar, right? I’ll show you here

00:37:13.000 –> 00:37:23.000
You can see for earnings multiples, you’re generally in like the 6 to 14 times range. Average is, let’s call it 10, 9.98.

00:37:23.000 –> 00:37:29.000
And that’s generally used more for a business. As you look at books of business

00:37:29.000 –> 00:37:32.000
Not a bad thing, right? But if you’re, I don’t know.

00:37:32.000 –> 00:37:41.000
A million in fees, or a million in recurring revenue, a million and a half, maybe two is probably the high end of that range of having sort of a lifestyle practice.

00:37:41.000 –> 00:37:46.000
You’re generally gonna price those based on a million or 2 million and below

00:37:46.000 –> 00:38:03.000
You’re going to price based on revenue. If you’ve got $700,000 in fees and I’m acquiring your practice, I don’t care what your overhead looks like, right? I maybe care about one or two of your staff people that are licensed and client facing, but I don’t care that you have waterfalls in the lobby or you work remotely in your home office

00:38:03.000 –> 00:38:08.000
So I’m going to take that block of business and put it into my infrastructure.

00:38:08.000 –> 00:38:19.000
You look at something doing 5 million in fees, now I care about the expenses and the infrastructure because I can’t take 5 million in fees, uproot it and drop it into my infrastructure. I need

00:38:19.000 –> 00:38:23.000
It’s by a turnkey business. So

00:38:23.000 –> 00:38:28.000
More than 2 million, undoubtedly you’re going to focus on earnings, EBITDA

00:38:28.000 –> 00:38:42.000
When you see some of the talking heads like me talking about, oh, earnings are all that matter. Well, those are firms that only deal with larger enterprises, because if you’re buying 50 million Aum, you could give a shit about that person’s expenses.

00:38:42.000 –> 00:38:45.000
Sorry to put it plainly, but you just don’t care

00:38:45.000 –> 00:38:59.000
5 million, 10 million, 50 million in revenue. We care a lot more about the expenses. And frankly, we don’t care about your revenue. I know there needs to be revenue to drive the earnings, but I’m looking at the bottom of the P&L, not the top.

00:38:59.000 –> 00:39:08.000
And you’ll see on the right here, I won’t spend a lot of time on this just for the sake of time, but I wanted to make sure this was in here for a talking point and you to look at later.

00:39:08.000 –> 00:39:25.000
You should think about the size of the firms, right? You’re going to go from 2 to maybe 3.5 times revenue for… I mean, I go to the max as 500 million AUM. Safely, that’s probably more like 200 nowadays, but 500 to $1 billion, you’re at the 8 to maybe 11 is pretty safe. You get up above

00:39:25.000 –> 00:39:29.000
3, and you started getting into some crazy numbers

00:39:29.000 –> 00:39:40.000
interesting terms to support it, right? Like, this isn’t a buyer going and taking a loan out from one of the industry lenders and paying you a check at closing to get to these kinds of numbers here.

00:39:40.000 –> 00:39:41.000
But

00:39:41.000 –> 00:39:51.000
These are still outrageous numbers for what is a service-based business at its core

00:39:51.000 –> 00:40:01.000
Getting back to those headline multiple, it’s also about those field terms, which again, we’ve talked about, but as a visual aid here, you can see deals we did, let’s say I picked pre

00:40:01.000 –> 00:40:05.000
Pre-pandemic 2019

00:40:05.000 –> 00:40:17.000
And it was pretty consistent in 2020 and 2018, but 2019 as a benchmark, right? If we look at 2019 deals, it was pretty simple. 80% cash down, 20% usually was on a seller note

00:40:17.000 –> 00:40:29.000
You look at deals today, those deals still happen, but that’s more your peer-to-peer deal nowadays. You want private equity deals, you’re looking at the 40, 30, 30. Where it’s 40% cash down

00:40:29.000 –> 00:40:39.000
30% enrolled equity, equity in the buyer’s firm, and 30% usually on an earn out, not a note. This is a note. This is an earn out.

00:40:39.000 –> 00:40:55.000
So it isn’t a good or bad thing necessarily. but it is important to note what we talked about before the retention risk. And if you have the appetite for that potential upside, but also maybe not getting all the value that you were expecting. If you got the appetite

00:40:55.000 –> 00:40:58.000
We can get you some amazing deals

00:40:58.000 –> 00:41:03.000
David, a question here. So are the revenue multiples on the previous slide

00:41:03.000 –> 00:41:10.000
By year, the average for the year, yes, correct. So if I go through here and look, I only have this year

00:41:10.000 –> 00:41:24.000
Well, definitely 2025. But the multiple for 2026 comes from 2025 deal data is 9.98 on EBITDA. This is 3.27 for revenue multiples in 2025. From all the transactions in 2025.

00:41:24.000 –> 00:41:28.000
All the transactions in 2024, so you’re exactly correct.

00:41:28.000 –> 00:41:29.000
So

00:41:29.000 –> 00:41:36.000
Value drivers agnostic of who you sell to. This could be your internal team, this could be private equity, or one of your peers.

00:41:36.000 –> 00:41:44.000
Revenue mix will always matter, right? Don’t click the slide. So the more recurring it is, the better

00:41:44.000 –> 00:42:01.000
And recurring could be fees, obviously, right? Financial plans, if you charge for it separately and you do it consistently, if it’s part of your rep fee, then I’m not giving you credit for the financial planning. Even on the brokerage side, though, right? It’s a little harder to get some of these private equity deals

00:42:01.000 –> 00:42:15.000
Which is not our main focus here today, but it is a little harder on the brokerage side, but it’s doable. But I would say even in the recurring 12B1s, trails, insurance renewals, all those would fall into that category. Growth rate matters

00:42:15.000 –> 00:42:19.000
Organic growth that is not driven by the market

00:42:19.000 –> 00:42:32.000
This one comes up a lot, where we’ll have folks that through the evaluation process even right. We’re seeing that they’re growing at 10, 11%, which is that’s good. That’s a great growth rate, right? Especially for a firm that’s starting to consider some offers.

00:42:32.000 –> 00:42:44.000
But then you start looking at how the market’s done over the last 5 years compared to how their growth rate has done. And now it looks more like they’re organically growing. If we look at new clients in, like, net flows

00:42:44.000 –> 00:42:59.000
There were, like, 4 or 5%. And the markets have propped up the other portion, which is good, don’t get me wrong, but buyers do not care about market appreciation of the assets when they’re negotiating a deal. So real venture talent is really important for anybody.

00:42:59.000 –> 00:43:02.000
Now, again, if you’ve got a lifestyle practice, disregard.

00:43:02.000 –> 00:43:05.000
If you have a lifestyle practice.

00:43:05.000 –> 00:43:08.000
Come 100,000 in fees, and you enjoy that

00:43:08.000 –> 00:43:20.000
Then own it. Don’t hire, don’t train, don’t deal 401k and benefits. But if you’re trying to grow an enterprise, then yeah, Gen 2, Gen 3 as a venture talent really, really does help clean financials

00:43:20.000 –> 00:43:35.000
Reduce founder dependency. Your goal collectively, sort of listening today as lifestyle practice should be to build a business that can exist without you, right? That at some point you could take a week-long vacation, two weeks and head to Europe. You don’t take your laptop

00:43:35.000 –> 00:43:44.000
And your work email is not on your phone, and you’re not worried, you’re not stressed. For most of us, we would have to take some blood pressure medication with us if we did that

00:43:44.000 –> 00:43:48.000
But that’s how you ultimately get the best values in this industry. So

00:43:48.000 –> 00:44:04.000
These are some core fundamental value drivers. There’s a few more questions that come in that I want to answer. So from Jim, what are the red flags buyers, somebody asked another question, moved it. What are the red flags buyers should look for when doing a sub 500 million AUM acquisition

00:44:04.000 –> 00:44:07.000
Frankly, I would go back to this one right here

00:44:07.000 –> 00:44:13.000
The founder dependency and the financials, frankly, the growth rate

00:44:13.000 –> 00:44:22.000
the bench of talent, you can build a great business under 500 million AUM for sure. I’ve seen some amazing very turnkey businesses.

00:44:22.000 –> 00:44:35.000
Most of them, however, are owner-operator businesses. If you pulled that owner out or put the cone of silence over them, you can get the reference, and you put that cone of silence over the founder for 6 months with no notice.

00:44:35.000 –> 00:44:40.000
You would be concerned about what you would see when you came out.

00:44:40.000 –> 00:44:58.000
Right? Because the firm is very dependent for growth, for operations. The most important clients in most complex cases, right? So under the 500 million, you really start to watch out for how much dependency is there on the owner? Where’s the growth coming from? Is it actually sustainable growth

00:44:58.000 –> 00:45:04.000
Or is it coming from the founders ability to get out there in the community, which is good while they’re there, but not good when they leave.

00:45:04.000 –> 00:45:08.000
So, good points to bring up, because again.

00:45:08.000 –> 00:45:16.000
You can have a firm above 500 million that’s very poorly run. You can have one below $500 million that is the opposite. But in general

00:45:16.000 –> 00:45:22.000
To get above 5 million, 10 million in annual fees or revenue in general.

00:45:22.000 –> 00:45:30.000
you’re gonna have a tough time doing that with a poorly run firm. It’s possible, but you’re gonna have a tougher time. So, size does help in those instances.

00:45:30.000 –> 00:45:46.000
Kevin had a question, so if you do a small firm at three and a quarter times revenue, is it common to base your recurring revenue on the average of the last 3 years, or do you use the most recent year? Good question. This one comes up a lot. Depends what’s happening with the markets and your revenue

00:45:46.000 –> 00:45:52.000
So when the markets have been doing well, which right now I’d say they’re doing relatively well, then most

00:45:52.000 –> 00:45:59.000
Sellers are focused on the last 12 months. Most buyers shift their focus to the last 3 to 5 years

00:45:59.000 –> 00:46:09.000
Right, because they want to see what the sustainable number looks like when the markets are shitty. And then we’re going to focus on the last three years because the last six months is not indicative of what the long term looks like

00:46:09.000 –> 00:46:16.000
The short answer is it’s a blend, right? You’re going to put emphasis on the T12, the trailing 12 months

00:46:16.000 –> 00:46:22.000
A little less emphasis on the last 3 years, and a little less in the last 5 years, but those things sort of blended together

00:46:22.000 –> 00:46:34.000
Or what a buyer’s going to use, or a valuation team would use as a way to sort of calibrate’s the right multiple? Where’s the right value going to land?

00:46:34.000 –> 00:46:50.000
We had another one here from Matt. So can you specifically define the term assets under management? Yes, I can. AUM. Assets under management as applicable for our discussion, how does that apply to a practice that is fee or commission combo

00:46:50.000 –> 00:46:54.000
You probably need to find any assets driving recurring revenue as AUM. Yes

00:46:54.000 –> 00:47:02.000
Yeah, more generically, more importantly, buyers would generally define assets under management, assets under advisory Aua, aum

00:47:02.000 –> 00:47:17.000
The focus is assets that drive revenue. In my earlier example, the very beginning, if you all were on the front that had two and a half billion AUM, 1 billion in managed money, the other billion and a half is interesting. Blue sky, some upside potential

00:47:17.000 –> 00:47:28.000
It’s not driving any revenue. So buyers really care about what drives the revenue. And that’s a pretty universal truth at any size.

00:47:28.000 –> 00:47:34.000
So let’s get to the rest of the slides here. And if there are more questions, I will obviously get to them.

00:47:34.000 –> 00:47:43.000
There’s one more quick one here. So what impact do you see when the firm being acquired is flat fee firm versus charging AUM?

00:47:43.000 –> 00:47:59.000
Flax fee firms don’t do a lot of acquisitions and they have a heck of a time selling. It’s not that it’s a bad thing, right? And it depends on how the flat fee is structured. We did a valuation for a firm not too long ago that was flat fee. Then they reset the flat fee annually. And boy, when you did the math

00:47:59.000 –> 00:48:05.000
Throughout the year, they deviated a bit from 1%. But if I looked at their fees on average, it worked out to about 1%.

00:48:05.000 –> 00:48:07.000
of the assets that they had

00:48:07.000 –> 00:48:23.000
So if it’s more like that, but we’re starting to see more interesting subscription models, some real true flat fee, right? That for the client they pay $3,000 for a financial plan, they pay X dollars for their advice, agnostic of the size of that firm.

00:48:23.000 –> 00:48:38.000
That’s less common, and the problem is on the sell side, those things are incredibly hard to sell because that’s not the typical fee model. Bad thing, but it’s hard to sell. On the buy side, you generally wouldn’t have a flat fee firm acquire a firm charging based on AUM

00:48:38.000 –> 00:48:51.000
Like to just incompatible, square block and round hole. Not saying it can’t be done, but if I went back and looked at all of our listings for flat fee firms, for firms bought by flat fee firms, you’d never see the two sort of cross over.

00:48:51.000 –> 00:48:58.000
So give you a few more of the slides here and we’ll get to the questions. So getting PE value from an internal sale

00:48:58.000 –> 00:49:14.000
Pretty easy. As long as you got time. So four main levers you can see here. One, start early. You need, I mean, probably five years, right, to develop a good successor, assuming you don’t get lucky on the recruiting side. 7 to 10 years to execute the transition, right? To get near PE value

00:49:14.000 –> 00:49:15.000
We need time

00:49:15.000 –> 00:49:18.000
We need to keep growth of focus

00:49:18.000 –> 00:49:21.000
And in a beautiful world, right, when these things really work.

00:49:21.000 –> 00:49:32.000
We’re getting the next generation to help support and drive back growth, right? So if you do a podcast, you do seminars, you do a radio show, you do marketing

00:49:32.000 –> 00:49:36.000
Right? It’s not just the founder as the face and voice

00:49:36.000 –> 00:49:51.000
So we get the whole team involved in the growth, and all of a sudden we’re in the teens on growth consistently, and you’re dollar cost averaging your way up on those sales, right? You sell the 1st 20% at today’s value. You sell another 20% 5 years later. And frankly, the firm may be

00:49:51.000 –> 00:50:05.000
close to doubling in value at that point, right? So you’re selling incrementally over time. You can definitely get close to PE value if you do it right. So start early, focus on growth, sell incrementally in tranches.

00:50:05.000 –> 00:50:21.000
Generally, you’re probably not going to do more than like 4 tranches. A lot of our deals, we’ll explore different structures and making sure the financing works, but 24, 25% for the first sale, 24, 25% for the second sale, keep it sub

00:50:21.000 –> 00:50:34.000
And then the final bion happens, and it’s the remaining 50%, or 51%. That works really well. What you’re not seeing a lot of, and you would never see to get close to PE value, is selling one or two percent to seller financed

00:50:34.000 –> 00:50:45.000
There’s some firms out there still doing it that way. A few firms like ours, but we could do that if that is what you wanted, right? Maybe you’re related to your successors. I get it. There’s sometimes you can make a compelling case for it.

00:50:45.000 –> 00:50:55.000
But not many of them. So if you want to get near PE value, we need to sell in branches. We need to do the right tranche size. We need to be financed appropriately, not seller financed

00:50:55.000 –> 00:51:04.000
We need growth as a focus. We need the team to be involved and really invested literally and figuratively. So

00:51:04.000 –> 00:51:20.000
The trouble is, it takes time to make this stuff work. The quick question here, the topical of this slide I saw come in. So internal succession with seller financing, what’s the interest rate most common? I think I might have it later in the slide deck, but it’s right around like 4 or 5%. It’s below market

00:51:20.000 –> 00:51:25.000
Right? Industry lenders are going to be at 8, 9%, I think, right now.

00:51:25.000 –> 00:51:39.000
Obviously dating this webinar, given that rates will move. But in general, seller financing has always been below market, right? Because you’re not trying to make your money on the interest. You’d rather make your money on the principal where you’re getting capital gains versus a 1099 INT

00:51:39.000 –> 00:51:54.000
And you’re generally, if you’re doing seller financing, it’s because you’re probably related to the successors, or you’re giving them a sweetheart deal, right? We do these deals a lot. Well, I mean, frankly, we’ll sometimes use stretch notes where the note repayment is tied purely to the profits they receive

00:51:54.000 –> 00:52:04.000
But again, those are in more unique scenarios. But short answer is, yeah, AFR is pretty consistent, something below prime.

00:52:04.000 –> 00:52:11.000
So last couple slides here that I want to get to getting private equity values from an external sale

00:52:11.000 –> 00:52:19.000
A little easier, right? We don’t have to worry about the internal stuff necessarily, but we do still want to start early because they don’t want to buy your job.

00:52:19.000 –> 00:52:23.000
Now, again, even in my example here, I would say start early.

00:52:23.000 –> 00:52:38.000
4 to 5 years before you want to retire is a pretty good benchmark because that gives them enough time and you enough time to get somebody else identified in there and get the client service responsibility and leadership responsibility off of you.

00:52:38.000 –> 00:52:45.000
Can you do it in less? No, not really. I mean, you might be able to, but they’re not going to take a flyer on that with the values that they’re paying.

00:52:45.000 –> 00:52:49.000
But again, from an external sale perspective.

00:52:49.000 –> 00:53:04.000
They don’t have outside money, right? They’re using financing, they have an interest rate that they have to pay. So if they’re gonna get near PE values, we need to make sure you’re involved, you’re supporting the transition, that it can continue to grow

00:53:04.000 –> 00:53:11.000
So 4 to 5 years worked well. Two to four would be, and you can see it on my middle bullet here.

00:53:11.000 –> 00:53:18.000
Or portion of this slide, two to four years would be your target. Not less than two.

00:53:18.000 –> 00:53:33.000
More than 4 to 5. I mean, I’m not saying your peers wouldn’t do that deal, but it can be a little harder if you’re going to stay around that long because you got two cooks in the kitchen. So start early, stay involved for a portion of it, and do expect to be there to help grow the firm a bit, right?

00:53:33.000 –> 00:53:39.000
They’re not going to have the same kind of expectations that the private equity firms do, but they’re still going to want you to be there and help grow.

00:53:39.000 –> 00:53:46.000
At the end of the day, kind of going back to the last slide on the successors to get PE value on an external sale to your peers.

00:53:46.000 –> 00:53:58.000
You… you need a team in place, right? If it’s just you and you retire and no one is left to service the clients, you’re going to have a tough time. We can still get you a good value, but it gets PE value

00:53:58.000 –> 00:54:09.000
We really need the team to be there, right? And so internal succession is really nice because it provides you both a plan A, internal succession, and a plan B, that if the internal team doesn’t work out

00:54:09.000 –> 00:54:15.000
The buyers would love to keep them right now. It’s an acquisition of your book and your talent. That’s a two for one

00:54:15.000 –> 00:54:18.000
So internal versus externally

00:54:18.000 –> 00:54:23.000
As far as your sale considerations, not private equity, just internal versus external

00:54:23.000 –> 00:54:27.000
You’ll see there’s various sources here, but it’s probably there’s a gap

00:54:27.000 –> 00:54:32.000
Right? External deals have a consolidation event happening

00:54:32.000 –> 00:54:39.000
I sell, you buy, we don’t need two receptionists, right? We can start to consolidate some of the overhead.

00:54:39.000 –> 00:54:45.000
Which is a synergistic sail, which means we start to generate additional margin on these things

00:54:45.000 –> 00:54:47.000
Internal sales, we don’t have anything change.

00:54:47.000 –> 00:54:55.000
I buy in 10% of your firm, nothing changes the day after. We just have to try to do more now with the profits that we had yesterday.

00:54:55.000 –> 00:54:58.000
But if you give yourself time, you can close that gap.

00:54:58.000 –> 00:55:13.000
Other components here, right, you’ve got control. I mean, that would be a reason why even if you acknowledge that there’s a little bit of a gap and you don’t have time to fix it. Control, continuity, legacy tax treatment, there’s still a litany of reasons to consider internal succession

00:55:13.000 –> 00:55:18.000
That, combined with time, though, and you can… it is possible to close this gap.

00:55:18.000 –> 00:55:22.000
We can get very close to the same values. It takes longer to get it

00:55:22.000 –> 00:55:28.000
But even factoring in time value of money, which I know is a thing, right? You can still get really, really close.

00:55:28.000 –> 00:55:30.000
So

00:55:30.000 –> 00:55:35.000
Let’s keep the wrap-up part here relatively simple, and we’ll answer the remaining questions. So

00:55:35.000 –> 00:55:47.000
Where to start to be successful? One is just figure out who, right? Who do you want to sell to? And that goes back to value terms fit. Like what is your priority? If you tell me it’s value, then

00:55:47.000 –> 00:55:56.000
If you have an internal team and you have time, we could focus there. If you don’t have the internal team or you don’t have time and value is your top priority, we’re going to help you pivot somewhere else, right?

00:55:56.000 –> 00:56:07.000
But then the when and the timeline matters, and bifurcate that, right? You got retirement, and when do you want to start cutting back and slowing down? Those oftentimes, are two different dates

00:56:07.000 –> 00:56:12.000
And if you’re sitting here listening and saying, well, I already slowed down, then you already answered my first question. You can now focus on the second one

00:56:12.000 –> 00:56:24.000
And then, how? How do you actually go about this, right? If you’re especially if you’re going to contemplate internal succession. It’s not hard, but it is complicated, right? And so you don’t want to generally do that one on your own if you can help it.

00:56:24.000 –> 00:56:31.000
There’s some good coaches out there, but this is pretty nuanced. If you’re going private equity or an aggregator

00:56:31.000 –> 00:56:36.000
I don’t care who you hire. I mean, selfishly would love for you to hire us. You seem like smart people. You joined us here today.

00:56:36.000 –> 00:56:38.000
Whoever you hire, don’t go it alone.

00:56:38.000 –> 00:56:46.000
What’s that old saying? I’m not a you know card player, card shark by any means. But I think it’s a poker saying. If you’re not sure who the sucker is at the table

00:56:46.000 –> 00:56:52.000
It’s you. The problem is, I’ve talked to folks who are selling and they’ve negotiating on their own

00:56:52.000 –> 00:56:57.000
They don’t think that they’re the sucker at the table. The problem is everyone else knows that they are.

00:56:57.000 –> 00:57:06.000
Right? And you’re never going to get good at this. If you sell, you’ll maybe sell 2 or 3 times, right? If we do it in tranches, you will never do it enough times to get good at it, at least I hope not

00:57:06.000 –> 00:57:20.000
If you’re a buyer you you might get good at it right? But you’ll do 4 or 5 acquisitions so you generally want some help. So your considerations, best price, best terms, best fit. We’ve hit this one right? So I won’t spend a lot of time on it. But

00:57:20.000 –> 00:57:35.000
You got to pick one, right? This is like the old sales saying good, fast, or cheap. You can pick two. Here you can pick generally one, maybe two. But you cannot pick all three. Or you’re going to be stuck and you’re going to be running the firm and be one of the folks we call RIPs, retired in place.

00:57:35.000 –> 00:57:39.000
Pick one, optimize the other two

00:57:39.000 –> 00:57:46.000
Your exit, we’ve talked about this one, the internal versus external. I mean, that is your option, right? External peer, external PE

00:57:46.000 –> 00:57:53.000
But that’s it, right? I mean, it’s relatively simple set of options to at least start your initial decision-making

00:57:53.000 –> 00:58:07.000
And then you got on the external versus internal, we’ll spend more time on this. We’ve got white papers and articles, but if you’re going to sell externally, you can do a full buyout, right? Where you sell the whole thing and you retire in 12 to 18 months after transitioning the clients

00:58:07.000 –> 00:58:13.000
You could do a partial book sale, right? This is another good way to get near PE values

00:58:13.000 –> 00:58:16.000
Where you sell the C and D clients now

00:58:16.000 –> 00:58:32.000
A couple years later, you sell the B clients, maybe to the same person, the first sale went well, and then eventually you sell the A clients. And meanwhile, market appreciation, you brought in a few more A clients because you have more time because you’re not bogged down with the C and D clients anymore. So full buyout, partial book

00:58:32.000 –> 00:58:43.000
Solence Day. This one works really well where you sell and you stay. It’s just a literal description of what happens, or a merger acquisition, right? But bottom line is, from a client’s perspective.

00:58:43.000 –> 00:58:45.000
you sold, and you’re still there.

00:58:45.000 –> 00:59:02.000
Right? So all they really think is the team got bigger. So these really do work well for getting good value, but you got to start early, right? Because you’re going to stay, you’re going to keep working on a part-time basis. And you got mergers. Mergers are not a great external exit option, but if you start early enough, it’s possible

00:59:02.000 –> 00:59:04.000
Probably the merger is

00:59:04.000 –> 00:59:14.000
it’s an economic marriage, so a lot of things have to line up, these things to work out, right? Which means you really probably want to know the person you’re merging with, and have known them for a long time.

00:59:14.000 –> 00:59:29.000
So internal options, you can do leverage buy-ins, proper recycling, phantom equity, which we do a ton of as sort of your gateway drug into real equity sharing. And you can even do partial book sales here, although it’s kind of a weird one, but we’ve seen it done

00:59:29.000 –> 00:59:45.000
Smaller firms will sell their C and D clients to their internal team member who can now have some agency, some ownership, and then also, but I wouldn’t call it a primary option. The main one is the first one, which is why I labeled it number one, leverage buy-in. You sell 24%

00:59:45.000 –> 00:59:51.000
It’s bank financed, you sell 25%, it’s bank financed. Couple years later you sell the last 51%.

00:59:51.000 –> 00:59:59.000
it’s bank finance, and they refinance all the old transactions. It works really, really well, but you need a little bit of time to make this work.

00:59:59.000 –> 01:00:03.000
So your options, if we go internal, external and PE

01:00:03.000 –> 01:00:16.000
Just to make sure we summarize it and that it’s crystal clear here, internal will technically probably be a little bit lower value. We can get close though, right? We’re looking at, like, 10x. If you look at the low end of the aggregators, 9x, I mean, you can get up there.

01:00:16.000 –> 01:00:28.000
It’s also your lowest risk scenario, right, because you sell, you’re still there, you got paid cash, took some chips off the table. You do that again a couple years later, and the firm has grown

01:00:28.000 –> 01:00:33.000
The really cool part is, for the internal stuff, oftentimes, by the time we sell the last 51% stake

01:00:33.000 –> 01:00:37.000
It’s worth more than the 100% they started with

01:00:37.000 –> 01:00:45.000
And sometimes they’ll sell down to maybe like a 20% stake and they’ll keep working on a real part-time basis. You’ve got a lot of flexibility on the interner.

01:00:45.000 –> 01:00:55.000
Where PE you don’t have a lot of flexibility, right? You sold out, you got paid. Now your job is to make sure that you could cash those checks

01:00:55.000 –> 01:01:10.000
Getting the deal done agnostic of internal versus external, but if you’re going to sell the business and it’s internal, we can obviously help you with our succession planning team, valuation, make sure the entity is set up structured correctly to get you the most value

01:01:10.000 –> 01:01:23.000
Right? Because how your entity is structured will impact your buyer’s ability to write off or not write off their buy-ins. So that’s an important component. But if you’re going to sell, we’re going to help you find a buyer

01:01:23.000 –> 01:01:33.000
You got two options. You choose and we facilitate, right? You say, I have a buyer gentleman, the lady down the street, I’ve known him forever. I want you guys to help us put that deal together

01:01:33.000 –> 01:01:40.000
flat fee basis, very simple, includes dilation, walk through the tax strategy, the contracts, and figure out the financing.

01:01:40.000 –> 01:01:42.000
Or we find your buyer

01:01:42.000 –> 01:01:49.000
Right? This is where you’re going to be looking at private equity, private equity-backed aggregators, peers, where we bring

01:01:49.000 –> 01:01:56.000
4 or 5 of the best candidates that are a match for what you’re looking for to the table, and then we negotiate the deals.

01:01:56.000 –> 01:02:06.000
So in a scenario like this, you’re obviously going to get better value overall, right? And representation, you’ll see my title here, it pays on literally every path.

01:02:06.000 –> 01:02:14.000
you’re gonna get a higher value, you’re gonna get better terms, you’re gonna have less risk, you’re gonna get more offers, which is frankly what drives the other things.

01:02:14.000 –> 01:02:17.000
But there are times, right, when you look at the

01:02:17.000 –> 01:02:25.000
you choose and we facilitate, your goal here, stop clicking on the slides. Your goal here is not to get the highest and best value.

01:02:25.000 –> 01:02:29.000
Your deal is to get a good value, probably good terms, but from somebody who you know and trust.

01:02:29.000 –> 01:02:32.000
then great. If fit is your priority.

01:02:32.000 –> 01:02:45.000
you can oftentimes get it over here as well, while still getting your price and terms, but if it is your priority and somebody who you specifically know and are identifying, then we just work on a flat fee basis versus a success fee basis. Either way, dealer choice.

01:02:45.000 –> 01:02:49.000
Regardless though, we can take you from start to finish.

01:02:49.000 –> 01:03:05.000
So as we wrap this up, five recommendations, quick hitters here, rapid fire. Start before you need to plan ahead and take action, right? And so I think annual valuations, if you’re not ready to retire now, is a great place to start. If you’re thinking internal, start early, which you heard me say like 12 times now

01:03:05.000 –> 01:03:11.000
But put him in the driver’s seat while you’re still in the car. Start the process before you’re ready to retire.

01:03:11.000 –> 01:03:27.000
Get the business ready, look at your financials probably once a quarter to make sure they’re clean. Again, going back and doing evaluation each year will help with that because we’ll look at your financials with you and tell you here are things to fix, here’s the things that you give yourself a pat on the back for. And last one is assemble your deal team

01:03:27.000 –> 01:03:43.000
If you’re thinking of selling to your internal team, you want to make sure you do that right because it can get real messy real fast. If you’re going to sell to a peer, you think we could hire an attorney to draft the contracts, but they don’t know the industry. And if they know the industry, they don’t know merger and acquisitions. Those are two very exclusive clubs

01:03:43.000 –> 01:03:56.000
So a firm like ours can help close that gap. We’re not going to exclude your CPA and attorney, but we can at least get you to the finish line and then we can all hold hands and walk across it together as a team. So make sure you assemble that team and start to figure out who’s a good fit for you.

01:03:56.000 –> 01:04:01.000
Because again, when it comes to selling, the goal is to just do this once and do it right.

01:04:01.000 –> 01:04:06.000
So that is a wrap, folks. I want to get to the rest of the questions here now that we are

01:04:06.000 –> 01:04:20.000
Close to the top there, a little over. We got a couple other webinars coming up. If you think mergers might be of interest to you, we’ve got that one coming up in August. We’ve done a ton of mergers. I think about the number of mergers we

01:04:20.000 –> 01:04:25.000
We’ve always been an M&A firm, but I think the number of mergers we did in like 2012, 13, 14,

01:04:25.000 –> 01:04:41.000
one or two per year, and they were big, big firms. Now we’re doing 20 or 30 mergers of some shape or size every year. And we’re not the only firm doing this. And then the other one coming up in September, we’ve got more scheduled, but these are the two upcoming ones, is selling in the next three to five years, what to do now

01:04:41.000 –> 01:04:42.000
very specific recommendations

01:04:42.000 –> 01:04:51.000
from our listing team. So with that, folks, I’m going to get to your questions now. I appreciate you carving out time and joining us here today. If you got a drop

01:04:51.000 –> 01:05:00.000
Be well, again, slide deck is available. Recording will come to you tomorrow automatically, and if you have questions and want to talk offline, contact information’s on the screen. Let’s get to some of the questions.

01:05:00.000 –> 01:05:06.000
So I’m going to start at the bottom here because it’s a quick, easy one. What are C share annuity trails worth?

01:05:06.000 –> 01:05:19.000
If you’re asking that question, it probably is more focused around like a book of business. And so they land right in that same 3. What was it, 3.27, 3.28 on recurring

01:05:19.000 –> 01:05:26.000
Now, technically, if you start bifurcating the recurring multiple, like a revenue multiple, for example.

01:05:26.000 –> 01:05:29.000
Third-party managed assets, probably your most valuable.

01:05:29.000 –> 01:05:34.000
Right? Because it’s scalable, it’s simple.

01:05:34.000 –> 01:05:44.000
But it’s a little more valuable than trails, 12B1s, fees, and financial plans are probably the lowest still recurring if you’re charging for it and doing it every year for clients.

01:05:44.000 –> 01:06:03.000
But you actually have, like, do work for those. And then you have to do work for fees and everything else, but like actual work, if you don’t do that work, then nothing happens. So cease your annuities, kind of the same thing right in that same recurring multiple range. Technically, maybe slightly lower than third-party managed assets, but not demonstrably different.

01:06:03.000 –> 01:06:08.000
A shares are another example, though, where you do sometimes see a little bit of a premium paid.

01:06:08.000 –> 01:06:15.000
Because it’s almost like a fixer-upper, you know, house in a great neighborhood in California, for example, where I get in and it smells like

01:06:15.000 –> 01:06:28.000
it’s not great. I won’t elaborate. You get in, you renovate, you fix it up, you tear everything out, and all of a sudden, there’s some built-in equity. A-share books are kind of the same way, right? If I can get in there

01:06:28.000 –> 01:06:36.000
It’s all recurring, doing a quarter point, but if I can convert a third of this to managed money, I can make a ton. So they’ll go for a little bit more sometimes.

01:06:36.000 –> 01:06:38.000
But they technically shouldn’t, but they do.

01:06:38.000 –> 01:06:54.000
Internal succession staff merger with another affiliate advisor is the selling owner’s comp added back to EBITDA before applying a multiple. Good question. So when you’re calculating EBITDA, earnings before interest, taxes, depreciation, and amortization. Those haven’t actually said that

01:06:54.000 –> 01:07:10.000
You may be wondering, what the is EBITDA? Or who is that? So it’s earnings before interest, taxes, depreciation, amortization. It’s basically the number at the bottom of your P. And L. It includes reasonable compensation for you as an owner. So if you’re doing, I don’t keep the number real simple, a million in annual revenue

01:07:10.000 –> 01:07:14.000
250 is probably reasonable comp. You do 2 million a year in revenue

01:07:14.000 –> 01:07:30.000
250 is probably reasonable comp. You get up to $20 million firm, $250 is not reasonable comp anymore, but $250, $300,000 is probably pretty reasonable for your compensation if you pay yourself less than that, super. Then a valuation firm or buyer is going to add back to

01:07:30.000 –> 01:07:34.000
To the 250 number as an example, don’t hold me to that one.

01:07:34.000 –> 01:07:39.000
And if you pay yourself 500,000, they’re gonna normalize it and adjust it back down.

01:07:39.000 –> 01:07:44.000
So, but it does include owner’s compensation, which is why I say it’s a good question.

01:07:44.000 –> 01:08:01.000
Next one, so if we’re going to sell and then stay, do you see any discount on EBITDA, AOM multiple? No, frankly. It’s not that there’s a discount or premium. It’s kind of the same. But I would say overall, the seller generally ends up getting more value

01:08:01.000 –> 01:08:09.000
Because most of those deals have like a rainmaker clause built in where they might get 50, 60% of first year new business that they refer in

01:08:09.000 –> 01:08:14.000
Plus, you end up then starting to pick up some additional investable assets from the clients

01:08:14.000 –> 01:08:20.000
Right? Because you had an older 65-year-old advisor who’s kind of in retirement mode, they’re not retired

01:08:20.000 –> 01:08:28.000
And then they joined forces with this young, hungry team that’s very technology forward. They’re using AI, they’ve got different products and services, they do taxes

01:08:28.000 –> 01:08:33.000
And all of a sudden, from the same clients, you’re starting to generate 20 or 30% more revenue

01:08:33.000 –> 01:08:44.000
So the solid state can actually have a little bit of a premium, not on the sale price, but on the total net monies earned and received by the seller. Not generally a discount at all, frankly.

01:08:44.000 –> 01:08:55.000
How do we handle the tax treatment in the sales structure? Good question. I mean, sometimes it’s a little bit of the card you’re dealt, right? If we’re doing internal succession and you have a S-Corp

01:08:55.000 –> 01:08:58.000
Well, then the buyer can’t amortize their buyers

01:08:58.000 –> 01:09:03.000
They’re gonna have basis that they’ll take the benefit of 40 years from now.

01:09:03.000 –> 01:09:13.000
But even then, a lot of times as we start down this process, I mean, I literally just had a call before this one, and the recommendation was before you start the succession plan

01:09:13.000 –> 01:09:29.000
restructure your entity. Let’s fix you, because they were a S-Corp. Let’s switch you over to an LLC taxed as a partnership owned by S-Corps, and all of a sudden, I promise you when we get to the spreadsheet work, your successors and you, because they can afford to pay you more, will be much happier.

01:09:29.000 –> 01:09:35.000
So, the key, though, is to make sure that the taxes are factored in when we do our pro forma analysis

01:09:35.000 –> 01:09:39.000
factor it in like it is a lever. Even if it’s not a lever

01:09:39.000 –> 01:09:51.000
It should be a lever if we have enough time to plan for it. If you’re negotiating a sale, let’s say a peer or PE firm, this will for sure be a lever that should be documented in your purchase and sale contracts

01:09:51.000 –> 01:09:59.000
And something that we factor in, we plan for, and if we’re working together, incidentally, you will plan for.

01:09:59.000 –> 01:10:11.000
Last couple here. So our revenue multiples on the previous slide by year, that one I answered. Fantastic. We’re one ahead of where I thought I was on the previous slide that states

01:10:11.000 –> 01:10:27.000
The size premium sets the ladder in the buyer’s price differently. Yep. What revenues are you assuming are being earned on those AUM ranges? Generally, I’m assuming for simple math, you know, 1% on managed assets

01:10:27.000 –> 01:10:30.000
I know it’s a bit fungible, but

01:10:30.000 –> 01:10:36.000
if we’re thinking. I think that slide is. I’ll just jump back to it since we

01:10:36.000 –> 01:10:38.000
are all still here together

01:10:38.000 –> 01:10:40.000
This slide.

01:10:40.000 –> 01:10:54.000
So if we’re looking at the ranges here, it almost doesn’t even matter, right? If you say we’re at the billion plus range, like my example of that firm that I mentioned earlier, two and a half billion, but a billion that’s managed

01:10:54.000 –> 01:11:04.000
Two and a half billion, but they’re only charging on a billion of it, which if you look at the raw figure would look like they’re probably like 40 basis points.

01:11:04.000 –> 01:11:19.000
In reality, it’s more about however you get there, 40 basis points, 1% on only a billion, the other billion and a half isn’t even charged a fee because it’s concentrated stock positions. Regardless, it boils down to the revenue that you’re applying these multiples to

01:11:19.000 –> 01:11:24.000
But 1% would be my simple answer.

01:11:24.000 –> 01:11:36.000
Get back to this slide with our phone number in case any of you want to call us. Last topic here. So if SRG is hired to facilitate the deal, will the parties still need outside legal counsel? Yes and no. No.

01:11:36.000 –> 01:11:51.000
We have counsel and paralegals, attorneys, CPAs that will put all of this stuff together. The rub is right Our counsel is not your council. So we’ll do all the contracts. You will have things that are ready to sign when you are done. Let’s put it that way.

01:11:51.000 –> 01:12:06.000
Now, if you want to then have your attorney do a final review, we’ll work with them. We’ll get the documents to them in Word. Generally, the attorneys, they don’t know this stuff, but they might know like your personal estate plan, your situation better than we would, which we can still try to factor in

01:12:06.000 –> 01:12:15.000
But we play nice with your attorneys, but if you don’t have one, we’re going to take care of all the contracts, all the tax strategies, work with you on the financing.

01:12:15.000 –> 01:12:26.000
There are instances, I’ll tell you, where we give you the recommendations, we give you the form contract language, because we’ve done this 100 times. We’ve seen people find it about it a few times. We refined the language

01:12:26.000 –> 01:12:32.000
And then you come up with your own way that you want to structure a callback, for example, that we’ve literally never seen anybody do

01:12:32.000 –> 01:12:47.000
Well, Kim, we can prepare it for you based what you’re asking for. But I don’t know if it’s a good or bad idea. Probably know, but you’re not looking for my opinion on that. You want to just type up the language. That would be a good example where, yeah, we’ll write it for you, but you probably want another set of eyes on it.

01:12:47.000 –> 01:12:55.000
In a lot of cases, though, you’re going to take our form contracts. You’re generally going to be right down the middle of the field doing what we’ve done before

01:12:55.000 –> 01:13:09.000
you know, not all deals are the same, but we’ve also done a lot of deals. So we probably have foreign language that we know works and we field tested. So it’s a tough one to answer. In general, I would say no, but if you go out of your way, it could definitely be a yes

01:13:09.000 –> 01:13:17.000
Last view here, so if you’re 30 million AUM firm, could you look for guidance since you don’t deal with that small

01:13:17.000 –> 01:13:33.000
And again, we can still help you even at 30 million AUM, right? If you assumed 1% on managed assets at 300,000, you get probably close to a million in value. It’s just going to come from a different buyer group. But fortunately, we’ve got, I mean, thousands of buyers in our network

01:13:33.000 –> 01:13:42.000
And we, frankly, haven’t always dealt with clients the size that we deal with now. So we still have a large constituency of clients, much like you probably have some legacy clients

01:13:42.000 –> 01:13:49.000
We still probably have 1,000 potential buyers that would love to acquire your 30 million AUM because they do 60 million AUM

01:13:49.000 –> 01:14:00.000
So that’s why I say science isn’t really a good delineation for how we can help. It’s more about how we can help you. If you said I got 30 million and I want a private equity deal

01:14:00.000 –> 01:14:04.000
Great. There’s a lot of things I want, but we’re not going to make that work.

01:14:04.000 –> 01:14:09.000
But if you’re flexible and you’re open, you can definitely get some great solutions.

01:14:09.000 –> 01:14:20.000
Let’s see, on EBITDA, you’re seeing for some 500 million firms. I mean, I gave you the range. It’s 30 to 40%. If you have 500 million, if you have 4 billion

01:14:20.000 –> 01:14:27.000
30 to 40% profit margin, including your compensation, is a pretty reasonable target. Frankly, the interesting thing is

01:14:27.000 –> 01:14:45.000
As the firms get larger, the margin actually starts to have a little bit more compression, where it’s hard to maintain a 30 to 40% profit margin when you’re at 5 to 10 billion AUM and above. It’s possible for sure, but you better be actively pruning the book of business, running a truly integrated ensemble team

01:14:45.000 –> 01:14:49.000
Or that’s going to start to dip into the 20s

01:14:49.000 –> 01:14:56.000
Or I mentioned that because I think most firms think as the firms get bigger, the margins get better. No, not most cases.

01:14:56.000 –> 01:15:04.000
Last couple here, so to do what you attribute oh so to what do you attribute the increasing revenue multiples

01:15:04.000 –> 01:15:12.000
I mean, efficiency demand is obviously a component, right? We have an average of like 65 buyers per seller

01:15:12.000 –> 01:15:21.000
Okay, you don’t need 65 buyers, you just need like 4 or 5 good ones, but it’s nice to be able to be picky. And so there’s still a lot of demand for these practices.

01:15:21.000 –> 01:15:26.000
Honestly, you know, David, who asked that question, I would say, in general

01:15:26.000 –> 01:15:29.000
efficiency of the market at these multiples

01:15:29.000 –> 01:15:39.000
In most cases, not all. Some of you can prove me wrong, but in most cases, at today’s multiples of revenue or EBITDA, these businesses generally can be acquired

01:15:39.000 –> 01:15:44.000
Paid for in cash using industry financing and be cash flow positive year 1 through 10.

01:15:44.000 –> 01:15:54.000
Marginally in years, maybe one, two, and three, but profitable nonetheless. And then as the firm continues to operate. You start to pick up some additional margin.

01:15:54.000 –> 01:16:05.000
As the multiples continue to creep up, and I don’t think they will by much more unless the deal terms started getting really creative or AI and sort of the bionic advisor

01:16:05.000 –> 01:16:10.000
really takes off in a big way, and we start to see some, like, efficiency gains possible

01:16:10.000 –> 01:16:29.000
But for now I don’t think the multiples have much more room to go up. And again, you’re already seeing the multiples go up on these PE deals purely through deal mechanics, not because they’re just paying more on the same terms. It’s coming through structuring the yield in a very creative way where you’re driving a lot of that value

01:16:29.000 –> 01:16:45.000
So that folks is a wrap. We are 17 minutes over. So for the 47 of you that could stick with us and join us here after the session ended, I appreciate it. We had some great questions that came in, few I didn’t get to that were a little bit longer that we’ll get to after today’s session

01:16:45.000 –> 01:16:49.000
Again, if you have an opportunity to join us for the upcoming sessions in August and September. If it’s topical to you, we’d love to have you join us. And if you just have questions, email a call.

01:16:49.000 –> 01:16:59.000
That’s a wrap, folks.