Sell­ers Leave Money on the Ta­ble

Buy­ers have a big M&A ad­van­tage and sell­ers are “stuck in the val­ley of doom,” says Ech­e­lon Part­ners CEO Dan Seivert.

Financial Planning - - CONTENT - By Charles Paik­ert

Buy­ers have a big M&A ad­van­tage and sell­ers are “stuck in the val­ley of doom,” says Ech­e­lon Part­ners CEO Dan Seivert.

THERE RE­ALLY ISN’T A SELLER’S MAR­KET IN THE RIA M&A space, says Dan Seivert, CEO of Ech­e­lon Part­ners, the merg­ers and ac­qui­si­tion con­sul­tancy and in­vest­ment bank­ing firm. On the con­trary, buy­ers are set­ting the deal terms and RIA sell­ers are “leav­ing tons of money on the ta­ble.”

Ad­vi­sors sell­ing their firms have a “blind spot,” ac­cord­ing to Seivert, who was speak­ing at the an­nual Deals & Deal Mak­ers Sum­mit in New­port Beach, Cal­i­for­nia. “Sell­ers’ firms are usu­ally worth way more than the terms they agree to be­cause ad­vi­sors are just fo­cused on what their firm is worth, not what the com­bined firms will be worth.”

Mark Tibergien, CEO of Per­sh­ing Ad­vi­sor So­lu­tions, agrees. “Ad­vi­sors who are sell­ing aren’t think­ing about the strate­gic value to the buyer,” Tibergien said at an in­ter­view at the con­fer­ence.

“In any deal, it’s im­por­tant to know the mo­ti­va­tion of the other side. Buy­ers have a fi­nan­cial in­cen­tive. Sell­ers are emo­tion­ally mo­ti­vated. It’s an easy play for the buyer — stroke the seller emo­tion­ally and give them a check.”

RIA M&A may seem to be a seller’s mar­ket be­cause there ap­pear to be many more buy­ers than sell­ers, Seivert says.

But he as­serts that is a mis­con­cep­tion. In re­al­ity, many would-be sell­ers get cold feet for a va­ri­ety of rea­sons, in­clud­ing un­hap­pi­ness with the buy­ers who ap­proach them. The num­ber of buy­ers is ex­ag­ger­ated, Seivert main­tains, be­cause so many firms don’t ac­tu­ally have the cap­i­tal or where­withal to get deals done.

When it comes to ac­tual deal mak­ing, RIAS with over $1 bil­lion in AUM are in high­est de­mand, but com­pe­ti­tion is fierce. Firms with AUM be­tween $200 mil­lion and $600 mil­lion are in am­ple sup­ply, ac­cord­ing to Seivert, and “rea­son­ably priced.”

RIA sell­ers with $600 mil­lion to $1 bil­lion in AUM con­sti­tute what Seivert de­scribes as “the val­ley of doom.” Th­ese ad­vi­sory firms, he says, are of­ten in tran­si­tion, mov­ing be­tween a bou­tique model and a small business model.

As a re­sult, many in this cat­e­gory have brought in C-suite level ex­ec­u­tives to run the business more pro­fes­sion­ally.

The prob­lem, he main­tains, is that the new class of pro­fes­sional man­agers of­ten clash with se­nior ad­vi­sors over such is­sues as com­pen­sa­tion, profit shar­ing, eq­uity dis­tri­bu­tion and di­vi­sion of la­bor. “It can lead to way more tur­moil than the firm has ever ex­pe­ri­enced,” Seivert says.

KEY MET­RIC FOR BUY­ERS

A key met­ric for se­ri­ous buy­ers, Seivert told the Deals & Deal Mak­ers au­di­ence (who were mostly buy­ers), is that sell­ers have at least $3 mil­lion in prof­its.

“It’s an in­sur­ance pol­icy for buy­ers,” Seivert says. “It means the business model is more sta­ble, and is a good in­di­ca­tor that rev­enue will be around $10 mil­lion with a 30% mar­gin. Buy­ers feel more pro­tected if the firm loses key per­son­nel or some­thing goes wrong.”

RIA sell­ers have a “blind spot,” says Dan Seivert of Ech­e­lon Part­ners.

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