The Importance Of Continuity Planning

The opinions expressed during this call are those of Aptus capital advisors and are subject to change without notice, this material is not financial advice for an offer. Selling a product forward-looking statements are not guaranteed. Aptus reserves the rights, modify its opinions and techniques based on specific inputs or client needs. More information about Aptus investment advisory services can be found in its form adv, part two, which is available upon request, starting to get a little bit better at reading that disclosure. it’s a mouthful, I feel. I feel like I just heard a, one of those TV commercials for, some new prescription drug.  

Exactly. Well, given maybe some of the folks here are familiar with Aptis and, and some are, are maybe not so familiar with us, we are of course, more of an investment focused firm, and we, we are definitely interested in, in bringing more practice management topics to the table.  

We thought this was a perfect time and opportunity, given, you know, what, what we’ve seen year to date. We have some interesting news just this week with United Capital, or I guess Goldman unloading United Capital to creative planning. And, and just the m and a space has, has transformed so much over the past 10, 20 years now. so, thankful to have Scott Leak with FP transitions here.  

And, essentially, we wanna make this more of an open forum as opposed to a presentation where we give an hour long, market update on the m and a space. So we, we’ve collected, Derek and I have collected questions from colleagues, questions from clients, and, we’re, we’re gonna make sure we leave time at the end for, for questions from, from you attendees.  

just to be sure this is time well spent and any more formal updates, white papers, data on, valuation trends, whatever it may be, that that could be a takeaway one-to-one conversation with either our team or Scott’s team. Of course. So, I’ll kick it off with a, a quick introduction to, to Scott. He is, industry veteran over 20 years.  

You almost said 40, oh my gosh. I thought that going Over 20 years in variety, the leadership roles at TD Ameritrade Institutional. And, kind of interesting this week being the, the last week of TD Ameritrade, institutional rest in peace. I actually also came from td, full disclosure, Scott. Scott did hire me on his team a number of years ago, and I, I’m looking to repay him by, wasting some of his time on a webinar today.  

So maybe I’ll figure out a better way to repay him. but Scott is now a, senior consultant and director of business development at FP Transitions. He, he really just brings a, a, a diverse background with working with advisors of all sizes, whether they’re looking to phase out of the business or in mass acquisition mode, whether you’re a state registered firm or multi-billion dollar firm.  

He just brings it a lot to the table. So, looking forward to the conversation today. Scott, maybe we could kick it off. Just, maybe you can just introduce fp transitions to the group and, and we can go from there. Yeah. Thanks. James and Derek, appreciate you guys having me. for those of you who are not familiar with FP Transitions, or maybe you’re loosely familiar with fp, we, we probably do a lot more than, than you realize.  

so you can certainly learn [email protected]. That’s fp as in financial planning transitions.com. basically we provide advice, consulting expertise to independent advisors who are looking to identify, build, and or realize, the equity value in their business. So that, that pretty much in a nutshell covers all of the services that we, we provide.  

We’ve been around since 1999, so over 20, almost 25 years in business. We’re now over 60 professionals, and most of them are highly compensated individuals. valuations team is staffed with certified valuation analysts and certified business appraisers. Analytics team is staffed with CFAs. We’ve got CFPs, MBAs and former advisors and business owners on staff. we’re now up to 10 attorneys on staff. So we really have everything we need in-house to do full end-to-end consulting for advisors on continuity planning, succession planning, m and a transactions.  

we do over a thousand valuations a year, have done over 15,000. Our history. We’re doing over a hundred m and a transactions a year, whether it’s advisors coming to us, asking for us to help them sell their business, or advisors who know each other and know they want to do a transaction, but still need our expertise to come to deal terms and, you know, legally document the transaction. So, you know, we do those services.  

We’ve got ongoing services for advisors that wanna do valuations, benchmarking, get coaching and consulting to those benchmarks. How do we improve the value of our business, either for eventually planning to sell it and maximizing that value, or if we’re on the buy side, how do we help firms make sure they’ve got the right capacity, scale and, and, everything they need to be successful buyers as well. So, that’s, that’s an hour long presentation that, that I can cover in about four minutes. So that’s, that’s a little bit about fp but, I’m more excited to, do this kind of fireside chat than, than just rattle off a presentation.  

So James and Derek, I’ll turn it back to you to start peppering me with questions. Yeah, sounds good. And we wanna be sure to focus today’s conversation around continuity, just because its important and feel like there’s a lot that our services mesh well with, when it comes to continuity, but, but also what a consultant would do and, and support through that whole process.  

So,  we’ll definitely get into that. maybe to start talking about trends and, and where we’re at today. What is the big takeaway from the deal flow and consulting you’ve done year to date? so, you know, if, if you’re looking at the headlines, from the industry press, there, there’s been an impression earlier this year and, and kind of throughout the summer that maybe there’s been a little bit of a slowdown in m and a activity.  

and I think there has been in some pockets, within our, our space, but, we are not seeing a slowdown at FB transitions. If anything, we will probably exceed the record number of m and a deals that we did last year, this year. still to be determined on that. But, I think when you’re looking at the headlines, you’re seeing the, the stories about the mega deals, the cis and the creative plannings and these Goldman type transactions, they’re not about the, the everyday advisor, the mainstream advisor, and the, you know, a hundred million dollars advisor that’s selling to a $200 million advisor, or the guy with a $25 million book of business selling to, you know, someone else or tucking into their business and having an equity exchange or doing a merger.  

Those all count, but they don’t get clicks. They don’t have, flashy press releases. So if you look at just that middle market of, of financial advisors, we are not seeing any slowdown in activity, and we’re not seeing much of a change in valuation. Awesome. yeah, and, and I, you know, our interest is really, I guess on both sides of, of the coin, you know, and you’d mentioned, you know, identifying, realizing, and building value inside of a firm.  

And we think of it, we, we kind of, we’re obviously an investment firm, but we’re really trying to help firms grow, and then ultimately realize their value. And so in some cases that might be, Hey, how can we put, how can we help you put processes and and practices into place that will help you, you know, in the short term, raise margins and do all those things, but over the long term make you a more attractive target for somebody else.  

But there’s just as much, if not more of the, Hey, how can we make you an attractive spot so that when you do come across a prospective, seller, you know, or somebody that’s interested in, in merging in, you know, how do you have the, the resources to compete with some of the larger players?  

And how do you have the professionalization of your firm, you know, to be more attractive. So I guess having that context of both sides, like from your standpoint, I’m guessing you see a lot more people tell you they’re looking to buy than looking to sell, and I’m just wrong, But Nope. what is, what is that ratio? And like, how, how often are people going through the entire process? Like somebody says, Hey, I’m interested. Go find, go find me a good advisor in this town. Yeah, it’s tough to do. but It is your Perspective there.  

Yeah. So, you know, like I said, we did over a hundred m and a deals last year. I think it was close to like 134, last year. you know, the, the number of sellers that we have to, the number of buyers is still probably about a 75 to one ratio buyers to sellers, excuse me. So you, you can assume, like, so the, the people who come to us and say, Hey, help me sell my business on the open market. I want to cast as wide a net as possible to make sure that I find the best possible fit for my clients, my staff, and then certainly to make sure that I’m, I’m myself and my, my estates taken care of.  

So, you know, on average, you know, there’s certainly times that that changes, but 75 buyers to every seller is about how many we see, inquire, to each of our listings. Now, some of those do fall through. and, and that’s something that I would certainly argue to advisors like going at this alone, you are far more likely to have your deal fall through.  

And the reason, because you’re going to experience what we call deal fatigue. And what happens is, and I talked to a guy about this just a couple days ago, who’s been doing it on his own, just buyer and seller found each other, and the seller finally said to the buyer, if you don’t have an offer in front of me by Wednesday, we’re off. ’cause they’re just so exhausted by this process in the back and forth. So, having someone like us come in and be that neutral, independent third party mediator and keep things on track and keep things relevant and, you know, dismissing things in the discussion that don’t belong there or are in the wrong place in the timeline, you know, some people do in due diligence at the wrong time or going too far too fast, whatever it may be, you, you’re more likely to see a deal fall apart, going at it on your own.  

we close about 87% of the deals that come our way, and it’s because we help keep them on track. Deals that don’t have professional support are probably closer to 50% completion.  

Is there, is there a typical, you know, you talk about fatigue, like is there a typical time on that these processes go through? Like, for you guys, I’m sure, I’m sure out in the informal world, stuff can, people can have informal talks for years, but like, what do you typically see when somebody says, Hey, we’re ready, we wanna engage you. What does that look like? Yeah, so I’ll give you two different answers. So if someone comes to us and says, you know, cast that wide net, help me find someone in the open marketplace. those from start to finish, from the time they sign an engagement agreement with us, to the time that we’ve got contracts written and the deal is done 150, 180 days, five or six months, somewhere in there.  

but that includes like a month’s worth of us, you know, doing evaluation, figuring out what the asking price is going to be and marketing the business and, and like filling out their kind of, their eHarmony profile, if you will. So we know that full profile of who the seller is and who they want their buyer to look like. Then there’s the whole vetting process and narrowing it down and l o i and due diligence and all those other steps.  

If two people come together, they’ve already met each other, they’ve known each other for a long time, they know they want to do a deal. know, those can certainly take that long as well. But generally they go much faster. Firms that have done, you know, multiple deals with us and kind of know our cadence and, and, you know, they’ve been successful acquirers. sometimes those get done in four weeks for someone who’s doing it for the very first time, and they might be having a little bit more back and forth, need more time to think about things.  

Those could go upwards of four months. The, The comment of deal fatigue makes me, just extra stressed about the, the idea of, you know, the, the client advisor relationship is obviously the huge, the, the biggest asset as part of the deal. And that deal fatigue could, could really, even if the deal gets done, could, could lead to, less patience as it relates to the transition.  

Would you agree with that? you know, and this is something it’s, it’s a good point, James. It’s something that we really look for and, and you know, in, in real estate they say it’s location, location, location. We tell our advisors it’s fit, fit, fit. The money’s gonna be there. Like right now, valuations are good, they’re as good as they’ve ever been. and that’s been the case for a couple years now. So you don’t really need to worry about getting a good, getting a good price for your business. It’s, it’s gonna happen.  

You’re gonna get multiple offers, they’re, they’re gonna be good to choose from. the, the challenge is, do you find someone that really is the best fit for you in terms of, you know, investment philosophy, you know, like this is something you guys recognize in what you do, that it’s really important, that, you know, everyone’s on the same page with investment philosophy. If you have two firms that have completely different, ways of going about that, or one firm’s all about asset management in-house, the other one wants to outsource it. One of ’em is all about, you know, financial planning.  

The other one doesn’t do any at all. Like, those deals aren’t gonna happen. Those are not good fits. So making sure that, you know, all those different boxes are checked and we’ve got kind of our list that we go through, that we make sure that the buyer and seller, you know, fit all these right criteria and, and are a good fit and the better fit they have, and the more guidance they’ve got going through it, it the better and longer we can hold off that deal fatigue. But eventually, yeah, everyone does kind of get a little exhausted by it. Once the deal’s inked though, that takes a huge amount of pressure off.  

And then it starts this probably 12 month process of working on the transition. Everyone puts their heads down. And hopefully, and this is what we try to do as well, by being that, that moderator in the middle of these, rather than each side hiring Don attorneys, and it turns into this dog fight of each side trying to advocate for their side to quote unquote win. You know, we’re not trying to get one side or the other to win. We’re just trying to get the deal done, and we’re trying to look out for the clients, look out for the staff that’s gonna have to transition over as well.  

So that critical period of 12 months after the deal is done is important too. But there tends to be this, this kind of resurgence and this energy after it’s done, everything’s inked. Now there’s kind of some excitement, and hopefully everyone gets their second wind. Understood. Yeah. On that front, if, if, if you’re talking to a, a first time buyer, what, what should they be thinking about for, as they look to acquire or finalize a deal as they plan for the transition?  

you know, we get that question so often that one of the things I did when I got here was I had our marketing team, and they just knocked it outta the park. We put together a, a page, a landing page on our website. So if you go to fp transitions.com/ready, like I said, are you ready to buy? we put together all of our best resources on acquisition readiness, and you can take a readiness assessment, you know, if you’re gonna inquire on one of our practices, how do you write a compelling inquiry?  

so that’s kind of where I direct most people to ’cause it. It’s, it’s really all of our thought leadership on this topic on one place. So for anyone who’s listening and that’s of interest, that’s where I would tell you to go. And, and I’ll, I’ll kind of just pause there and, and, see if that’s a good enough answer for us to move on to the next one. But yeah, I mean, you need to have scale, you need to have capacity, you need to, you know, we, we tell people it’s one thing to be able to afford a practice, which is easier and easier to do.  

There’s so many banking institutions out there now that, that get our industry and are willing to lend in the space, their seller financing options. What really matters more than being able to afford a practice is being able to absorb a practice. So, you know, it’s, it’s about the scale and capacity. Those are the big things. I, I guess on that, on that same note, in dealing this, this would come into play with both, you know, could be a, a succession or a, a transaction or just a, a internal continuity transition.  

But, that handoff, if, if we’re talking about non-professional buyers, you know, first time, let’s say first or second time buyers, how, oh, look at that. How much heartburn is there in that handoff from, you know, obviously with, with your help, you’re gonna say, Hey, this is the checklist to make sure Yeah. That everybody’s happy. And, and ’cause ultimately the clients need to be happy and the, and the, yeah, the seller needs to feel comfortable that the clients are in good hands.  

So I wonder how much of a challenge that part of the process is. It would seem to me to be a pretty, the biggest part. Yeah. You know, I, I tell people that, you know, we’re not done just because the deal’s done. you know, we provide a lot of post-closing support as well. So making sure that everyone understands what’s, what’s kind of the timeline, what should be expected here. you know, what’s, what’s the proper communication strategy with the clients? You know, who, who tells them first?  

And when do you tell them? And when do you tell the staff? those are all really important considerations. So, you know, not just are we here to do all the legal work, but we’re, we’re really here to be consultants and, and guide them through step by step. So, I think we do a, a pretty good job of making sure that once the deal is done, everyone is still doing the right things, taking the right next steps. You know, we’ve got, you know, templates that we’ll give advisors, like, this is what a letter should look like. They’re gonna send to your clients and explain to them, Hey, as a fiduciary, particularly the case of an r r a as a fiduciary, I think it’s important that I find a continuity plan, a succession plan, and make sure that when I’m done here, you don’t have to go out and find the next advisor and go through that awful process on your own that I have done that for you.  

I’ve done the vetting, I’ve spent a lot of time, you know, making sure that I find someone who’s not only gonna pick up where I left off when I’m ready to go, but possibly is gonna do an even better job than I did. And oftentimes when you’re selling to someone, you’re selling to someone who has the scale and capacity and therefore is larger than you, and most likely has more services than you have to offer.  

So generally speaking, an advisor is legitimately able to say to their client, I found someone you, that’s, that’s gonna be an upgrade for you. I, I went ahead and shared the, the website. I, I, I’ve, over the past couple weeks have, just a quick plug. I have spent some time on their site, this, acquisition readiness and, and also just their, the main page just going through all their resource and, and white papers.  

And there’s just a ton there. So please, please leverage their site in addition to, to, to the team there. going back to, I, I know you kind of mentioned investments, and this could be a question for Derek and, and you, but, but maybe, Scott, I’ll get your thoughts on this first, what’s important in your eyes on the investment side to, to ensure continuity, you know, a, a successful transition, whatever you wanna call it.  

Yeah. So for, for advisors who are looking to do continuity planning or succession planning, and let me just pause for a second. So if I get distracted, James and I, I missed the original question, you get me to come back to it. I want to just be clear on the terminology here. ’cause I think people use these interchangeably. We define continuity planning as making sure that you’ve got something in place that covers what is gonna happen to the business and to the clients in the event of your death and or disability.  

So this is kind of like your, beneficiary form for your advisory business. and that’s something I tell advisors, this is that important. This is most likely one of your most valuable assets, if not your most valuable asset. And for you to not have a written executable continuity plan is the same thing as if you let a client submit an IRA application without a beneficiary form. You just wouldn’t do it.  

Have to. and, and so we, we think it’s vitally important. We actually have a service called our, our equity management Solution essentials, because we believe it to be truly essential. Every advisor get a, a written documented continuity plan. And so we’ll provide a valuation and a, a, a drafted continuity plan, again, with all the attorneys we have on staff. You know, we can make sure that these are well designed, cover all the bases, making sure that if we’re gonna de, if we’re going to describe like what’s gonna happen if someone becomes disabled, we have to adequately define what does disability mean.  

If we’re going to say that if, if someone passes away that this other person is gonna buy their business, what are the terms and conditions of that? Because the person who passed away isn’t there to negotiate anymore. We have to do the negotiation upfront. So, you know, it, it is really detailed work, and it’s really important for advice. It doesn’t take long to do. but it’s vitally important that everyone have, in my opinion, a continuity plan for death of disability. A succession plan, on the other hand, is much more about I want to control my own exit on my own timeframe, and I’ve built this business that I want to be multi-generational.  

I want it to be as sustainable enduring business. I don’t want to just go out and sell it to, you know, name the, the, the aggregator out there. Not that there’s anything wrong with that, but if, if you really want to have a legacy and have your business continue, maybe you’ve got someone in the business, you know, a second generation or a G two as we call it, that you wanna sell that business to, and you’re possibly selling it to them in tranches. So you might sell them 10% one year, and then three years later sell ’em another 10% and then three years later sell them 20% and so on.  

So that succession planning is really to help that advisor have this glide path to retirement that they can start taking a little bit of time off on Fridays or taking July off and, and take some of the responsibilities of ownership off their plate, put those onto someone else, and maybe they can start having more fun going back to just being an advisor again for their clients and freeing up some of the capacity to do the, the fun part of the work.  

So again, I just want to kind of differentiate between continuity and succession planning, but going back to your question, James, on, you know, the importance on the investment side of things, again, whoever your successor is, or whoever your continuity plan is, this needs to be someone who has a similar investment philosophy as you. These are one of the most core things that advisors often talk to their clients about, to say, you know, Hey, this is part of my value proposition. And if you’re gonna partner with someone that has a different value proposition, that’s gonna be a kind of a difficult incongruent experience for those clients.  

Should one of those triggering events occur? so yes, we consider it to be vitally important. That’s one of the top things that needs to be lined up when it comes to fit between two parties. And, and I guess my, you know, James, my, my take there is we’ve, you know, we’ve certainly experienced cases where somebody manages a hundred households and they’ve got 95 different, different portfolio models.  

You know, it’s really very custom. And, you know, Scott, I’m assuming that’s a tough business to sell. it’s, it’s gonna get a lower valuation just because of the difficulty in a lot of those cases. It seems like so much is in the principal’s head, you know, this person’s been doing everything for 30, 30, 40 years. Yeah. And they know it. But has that been translated to the staff and can it be, be translated to any perspective? Can it be translated? Can yeah. So for firms that have, more standardized procedures, you know, I mean, we, we kind of describe advisors of having these four phases of evolution of a business.  

So you start off where you’ve gotta a book a business, and then maybe you kind of get a little bit bigger. You start to maybe add someone, staff-wise, and you become more of a practice. Then you get to a point where maybe you’re gonna add a second owner to the equation and you become a firm. And then potentially you get to that point where you’re this full-blown enterprise where you’ve got a whole C-suite and, and, you’ve got really documented procedures.  

But we recommend that even before that, somewhere in that practice to firm range is where it’s really important to, have as many standardized procedures as you can. And I’m not saying don’t have bespoke portfolios for clients, that’s not it. But it needs to be something that is, is able to be easily replicated. And so if you’ve got things that are so bespoke that they can’t be replicated, that’s where you get into challenges Are, are you seeing that standardization in firms, let’s say under two or 300 million?  

Oh, for sure. Yeah. that, that’s happening all across the board. And, and, you know, I think for a lot of younger generation advisors, you know, the ones that are coming out of, you know, Texas Tech, Kansas State, a lot of the financial planning programs, you know, we’re seeing them realize there’s so much value in the planning side of the work that the, the value of them spending a lot of time stock picking isn’t worth their time.  

That’s not the best value, that’s not the best use of their time. It’s not the best value add for the client. So they need to work with someone who like, does have the expertise and that can do that efficiently, and they can focus on the client experience. Makes sense. any, any landmines like there, there’s obviously things that, that, you know, anyone would think through like, Hey, Andy, this person just totally changed their mind, or we went into the process and found out it wasn’t really a good fit.  

like, are there certain structural things that really should be known upfront that you, you would maybe identify upfront, that really would derail a lot of deals? again, and, and I know this is self-serving of me to say this, but, I really am drinking my own Kool-Aid here. not having someone there to tell you what those landmines are and walk you through all those scenarios and help account for them in proper documentation, that in and of itself is a landmine.  

So, you know, for advisors that are just thinking, you know, my my old, you know, fraternity brother from college is an attorney, so I’m just gonna use him for this. He’ll, he’ll charge me, you know, a low fee to, to do this work. If that person doesn’t know anything about m and a, if that person doesn’t know anything about the highly regulated nature of the industry in which we work, there are going to be those landmines that that person doesn’t know to include in the language.  

I’ll give you a good example of this. we worked with a firm, back in 2018. They did succession planning with us. The founders had three G twos that they wanted to each sell 5% to. Fast forward to earlier this year, that firm called me up. The 5% had been paid off. you know, they, they had to take out, financing. Each of the G twos had to take out financing to pay for their 5%. Those loans got paid off. So now it’s like, okay, are we gonna do another tranche?  

And what happened was the, the first, G two actually said, I don’t like being an owner buy back my shares. We had to go back and reread our original documents and see what did we put in there to account for this scenario. And it would be very common for someone who doesn’t know this industry well, to not account for a scenario like that and put in how are we gonna handle that situation? And it turned out that we had to put it to a vote among the owners. There had to be 80% approval on it, and then once it was done, this is how the buyback was gonna occur.  

So all of those things need to be properly spelled out. so yeah, I mean, it’s, it’s really important to, to just have some guidance and know what could go wrong. because the list is pretty extensive. I can’t, I can’t outline all of ’em right now, but that’s just one quick example of a firm that had one of those landmines. And thankfully, you know, we helped them with the proper paperwork to account for it. And you mentioned, you know, kind of when you were talking about a firm going from practice to firm, is is an ideal time to think through standardization?  

Is that all, do you think about structure, you know, the legal structure of the firm, you know, whether it’s set up as, as, you know, SS Corp, L L C, all that stuff, and also comp structure of their, let’s say their key employees. Like, are, is that a time when people really should address that? And who would they address that with if they’re, if they’re not looking to buy today, but they do wanna set their firm in place or looking to sell today, but they wanna set their firm up, up for success?  

Like, is there things that they should be Considering that, that’s actually one of the most common scenarios that we, that we do our kind of project based consulting work on. So we call this our enterprise consulting work. And what happens is someone comes to us and says, just that, and I’m working with a firm right now and firms do this. Sometimes they do this at, you know, 200 million, sometimes they get to 2 billion before they realize this business is gonna break if we don’t fix it. you know, where maybe they’re the, the $2 billion firm I’m thinking of.  

they’ve got five owners. Each of them are still operating in silos. They are not, they are not a true ensemble. And so we had to look at this entity structure that was set up when this business was founded in 1964. It hasn’t changed since then. It was never designed to become this $2 billion business. No one ever dreamed that this would turn into that type of business. So it wasn’t designed to be that way, way. so we’re taking a look right now at, do they have the right entity structure in place?  

Do they have the right organizational structure in place, and then do they have the right compensation structure in place? So we’re, we’re actively retrofitting this business to be the way a $2 billion firm should look. So it can grow into be a $10 billion firm. And we can do that with firms of all sizes. The process is the same. It’s just a matter of when do they realize they need to do it. does the, just kind of shifting a little bit to, to the valuation environment, does the way in which, a, advisors registered, how, how much does that impact the, the value of their business?  

So r i A to I b D to, you know, Yeah, it, it, it, it can have, it can have some pretty significant impact. you know, when we do a basic fair market value, valuation, you know, there’s three primary things that we’re looking for. We’re gathering about a hundred different data points, but we’re trying to condense them onto these three categories. We create different indices for each.  

So the first one is, what’s the cashflow quality of this business? So we’re looking at the revenue and how much of that revenue is recurring revenue. So certainly an r I A or a hybrid is gonna be worth more than a registered rep. The more recurring revenue there is, the higher the, the, the valuation’s gonna be. you know, we’re also gonna look at things like, you know, what is the, what is the transition risk of the client base clients of RIAs who’s, you know, they’re working with someone who’s a fiduciary, tend to be a little bit stickier. how long they’ve been with their advisor, how long their advisor’s been in business.  

Those are all factors that go into what’s the transition risk of this book of business or this firm. And then lastly, what’s the market demand? so that goes into geographic region that this business is placed in. Does it have any particular type of niche that might be worth a little bit more, you might narrow the focus of who could potentially be a good fit, but that doesn’t necessarily reduce the value. So is there a, a valuable niche that the business might have? and then again, whether they’re registered as a registered rep, an I A R, an r a a, like, those do impact it.  

And the more fee-based and the more towards an r a you are generally speaking, the more valuable the business is gonna be. Nice. But if I, if I had to choose between being a registered rep with 500 million in assets in our management or an r i a with 50 million, I’ll take the 500 million as a registered rep that’s gonna have a higher dollar value. Yeah. Understood. just wanted to make sure, any of the attendees who have questions wanna, pick Scott Spring, you have the opportunity to do that, free of charge, for, for a few more minutes.  

So please jump in, just use the q and a feature, on the, on the Zoom. Derek, I, maybe this actually goes back to the enterprise conversation and, and going from a practice to an enterprise. And I, I know the, you know, you, you touched on this earlier just talking about having a well documented process, scalable for, for all your different, pieces of your operation.  

Can you maybe expand on what enterprise value means to you and, and maybe what advisors as they continue to hit different benchmarks for, for their size and revenue Yeah. And what they’ve been thinking about. So when, when you think about there’s, there’s two main types of value, when, when looking at advisory businesses.  

So first and foremost is revenue strength. So again, that goes into what, what is the, what is the recurring revenue? What is the revenue growth rate? all of the things that really go to the bottom line of, you know, what this industry is about, it’s, it’s recurring revenue. we’re not selling widgets, we’re not, you know, we don’t own factories. What’s being sold is the client goodwill and the, the, the recurring revenues that go with those client relationships. when you talk about enterprise value, think more about what are the, the people and the structures that you put in place to handle the revenue growth.  

So revenue growth can happen kind of on its own, but you need to have, this, these enterprise strengths that are, you know, thinking about things like, how much money am I spending on overhead, and how much am I spending on technology, on marketing? am I paying people the right amount enough to retain them? You know, there’s a lot of different factors that go into that enterprise value that isn’t necessarily related to the revenue itself, but it supports growth, it supports future revenue.  

And so the more that advisors grow, they can think about and, and focus on what are the ways that I can build enterprise value that in turn creates this virtuous circle, that can lead to more revenue growth and, and helps that business become sustainable. So Let’s assume, And James, James and Derek, I’m not looking at the chat, so hopefully you guys are, and, and, if there’s questions, you’ll, you’ll, you’ll read those couple, Couple questions came in, which I know are tricky to answer because there’s all ranges, you know, without knowing the specs, but like, assuming this isn’t a poorly run enterprise, you know, are, are poorly handed off enterprise or a phenomenal enterprise, like in the middle, a couple questions that came in that are kind of tied together.  

Like, what are current valuations and, and what are the term deals, timeframe, payout? Like, where do you, what’s a starting point?  

You know, you’ve got a firm that is kind of run pretty well. maybe they’ve got models in place at least, and they’ve, they’ve got some kind of documented investment process. Like, and, and, and the, and the demographics of the book aren’t, you know, they’re not all 80 year old clients, right? Right. can you give a starting point of where your team starts? Sure. by the way, I’ve, I’ve been on stage at many conferences. I’ve done many webinars. I’ve never, not had this question come up. So, I would’ve been really disappointed if somebody didn’t ask this.  

that being said, I hate answering it. it depends. Like it, Derek, if you and I each went in to buy an F one 50 tomorrow, I go into the local dealership for me, you go into yours, I walk out and I’ve got a thousand dollars monthly payment. Yours is seven 50. Did I get screwed? I don’t know. It depends on what the deal terms were. so it, it, this is why when we try to have our basic valuation be as affordable as possible, it’s $1,200 to get a valuation done.  

We’re gonna take a hundred valuation points or a hundred different data points to come up with what is your precise value. We don’t state our valuations in terms of multiples. We give people an exact dollar amount. So we’re gonna state on the open market, under average deal conditions, this is what we believe to be the most probable selling price for this business. And let’s just say we’re talking about a business that has $3 million in value. If I tell you that that business has a 2.9 revenue multiple versus a 3.0 revenue multiple, so the different 2.9 versus 3.0 that is a 600,000 or a six figure difference, it’s a hundred thousand dollars difference between those two numbers if we’re just off by 0.1 on the multiple.  

So I, I hate using multiples because when you convert it to actual dollars, it’s significant. So $1,200 to get a valuation done to know precisely where it is, is worth spending. But that all being said, low end right now, 2.3, for maybe a business that isn’t perfect, to a little bit over three, 3.1, 3.2 is, is kind of the high end around three is about the average right now.  

But again, I, I hate answering this question because everyone always assumes like, oh, well mine’s, mine’s gonna be on the high end. just get a, get a formal valuation done. And by the way, if you are going to have, bank financing done, there’s a very good chance the bank is gonna require a certified valuation in that way.  

Got it. And, and the other part of that, that’s, kind of Oh, deal terms. so how long, Oh, go ahead. Well, I, I didn’t answer the deal terms thing, so lemme do that real quick too. So when I say average deal terms, like this is the most probable selling price on the open market using average deal terms the last couple years, the average deal terms have changed a little bit, but, but not significantly.  

We are starting to see some changes because of interest rates, but for the most part, deal terms lately have been 40, 45% down payment. the remainder being on a three to five year note, with maybe about a one year lookback provision, requiring a certain amount of client, retention. And then from a, from a tax standpoint, probably 90 to 92% being allocated to client goodwill, which for the seller means it’s gonna be allocated to long-term capital gains.  

the remaining, you know, eight to 10% would be, restrictive covenants. And, you know, any consulting agreement that says, you know, for the next year, this person’s gonna help transition the business that would be taxed to the seller as ordinary income. And then obviously for the buyer, there’s just different tax consequences. So that is yet again, another negotiation point, in these deals is what’s the, what’s the tax allocation gonna be? ’cause buyer and seller each have opposing goals, when it comes to how those are allocated.  

W would those deal terms be quite a bit different than maybe 2021 just a couple years ago? two years ago? No, not that different. you know, the, the down payments have been steadily increasing. and, and I think we’re gonna see that continue with, with interest rates going up. The more down payment there is then the less the note is, and the shorter the duration of the note, and so the less interest that gets paid.  

but, you know, there’s still ample cash out there. A lot of buyers are still coming with cash. and I’m not even talking PE firms necessarily. And then oftentimes the seller is saying, well, I’ll do this seller financed, I’ll be the bank. And, you know, the revenue is gonna come from the business itself. And so the seller can take on the, the interest payments as well, or the, the, you know, they get the, they get the coupon, if you will. Hmm. So, you know, if you’ve got a, if you’ve got 75 buyers for every seller, how many are actually going, getting through the filters?  

Like, let’s say somebody is a committed seller, and they’re serious about selling. They’ve gone through a valuation, they’ve, they’ve gotten their firm into position. of those 75, are they gonna end up talking to 10 firms? Like what, how, how aggressively is the filter? Yeah, and and I, I should have, our, our m and a director always, had a good point when it comes to this. There’s actually one buyer for every one seller. Good point. there are 75 interested parties and people inquiring on each, but, you’ve got one buyer for every one seller.  

and what we do when, when we get all those inquiries is we’ll go through, we’ll do the kind of the eHarmony thing, see who, who checks the box. So if the seller said, I, I will only sell to someone who’s got a C F P on staff, okay, we have people that will inquire without a C F P on staff, even though the, the description said, you’ve gotta have a C F P on staff, or I want to have, you know, someone who’s willing to maintain the lease in the office.  

And the, some of the buyers don’t read that and don’t actually want to do that. So we can rule out, probably half of ’em before we even really start to read the description that each person wrote that said, this is why I’m a good fit for this seller. we’ll narrow it down, depending on the situation too, somewhere in the five to 10 range, present those to the seller. I mean, we’ll give ’em the list of all 75, but part of what they’re hiring us to do is to prevent that deal fatigue.  

They don’t wanna read through 75, submissions or take 75 phone calls. So we’ll do that work, we’ll narrow it down, try to get to a point of like, Hey, here’s the, you know, 5, 6, 7, 8 that were like, really good fits that seemed to check all your boxes. Why don’t you read their descriptions, look at their profiles, and you come back to us and you pick three or four you want to have interviews with. And then we’ll have everyone sign non-disclosure agreements.  

We’ll get on the phone and we’re on the phone with every single, potential buyer and the seller all the way from first call until deal close. we never have the seller on their own. So, you know, we’re, we’re, we’re very heavily involved, very, very handholding in that. And, you know, once, once they’ve read all those descriptions, they’re probably narrowing it down to about four, and then hopefully getting letters from 10, from two or three of ’em. I Don’t wanna drive you to the bar immediately.  

So I, I think we’ll maybe, slow down and, and stop peppering you with questions, Scott. I, I do have one more. right. I should’ve, should’ve said I had one more question and then said that, but, nevertheless, I, I’m, I’m just curious, going back to your continuity versus succession comment from earlier. Mm-hmm. Yeah, And I, I, I always remember at td, you know, those sole practitioners that, were on our platform, were always a, a business risk for us, you know, retaining those, right?  

Those assets, they were 70 year old, or, or, or however old, advisors, working on an island. And I, I’m just curious if you guys have any data or perspective on, like what is the percentage of advisors that even have that, the, just the, the will or the, the continuity plan, just in case they’re, they’re something unforeseen happens.  

It’s, it’s unfortunately really low. it’s still Okay. Roughly, Roughly 75% of advisors transition their business through, the worst possible way possible. And that is attrition. only 25% of advisors actually sell their businesses. So this is a tremendous opportunity for everyone out there. Again, get a continuity plan in place, just something in the event of your death or disability. I had an advisor who 52 years old, had a 38 year old in the business, didn’t get around to drafting the continuity plan with the, the 38 year old.  

he was there for about two years when the, the 52 year old, had an aneurysm in the middle of the night and, and didn’t wake up the next morning. And, the 38 year old ended up getting into this unfortunate battle with the, the widow who was, you know, trying to deal with three little kids and the death of her husband, where she wanted the full valuation that we had done on the business.  

And they’re already starting to have client attrition and, and not recognizing the valuation of the business was what the business was worth when John was still alive. And so when he’s not there to help with the transition, or for us to immediately do the transfer, and have everything buttoned up and ready to go, you’re starting to have attrition. And she’s still insisted on the full valuation, which wasn’t applicable anymore. And so he’s like, you know, I want to do the right thing for her. I want to help her out. I can also walk across the street and start up, you know, Johnson Wealth Management, and I call all these clients I already know and I don’t have to pay her a dime.  

So, you know, it’s, it was just a really awful situation for both of them to be in. And they both wanted something that was reasonable, but they couldn’t come to an agreement because they didn’t do it before John passed away. So again, I just implore everyone, if you do not have a written continuity plan, please put one in place. It’s the best thing for you to do for your clients. If you have any staff, you know, someone needs to be able to write the, the, the paycheck the next day, if anything happens to you.  

and then certainly it’s the right thing to do for your, your estate as well. So even if you don’t need the money, you know, that type of planning work is important to, to the clients. I think it’s important for us as an industry, as an independent industry, this is an advantage The wirehouses have over us still. You, you walk into a Merrill Lynch advisor office and hire a Merrill advisor. You have a Merrill advisor for life. You never have to look for another one, even if your Merrill advisor passes away. So let’s, as an industry, like in the independent space, we need to make sure that, that people who decide to work with an independent advisor are making the right decision.  

And, and we have a responsibility to, be responsible professionals in that regard. Yeah, No, that’s, a great way to end it. I just wanna remind everybody, we offer our team at apti offer a ton of resources to help really institutionalize or professionalize, your, your process with our shared c i o services.  

So if you’re not using us today, please lean on us because the more structure you have in place, obviously it can lead to, to the, you know, longevity of, of your, of your business, the Greater enterprise value. Yeah. Greater enterprise, all all of these things. So, if, if you want to contact Scott, we’ll, we’ll be sure to include his information, or, just, just hit one of us and, and we can get connected with his team. And again, that, website is fp transitions.com/acquisition readiness.  

Is that right? we made an even shorter version, so I would just go to fp transitions.com/read and it’ll redirect to the longer r l. Okay. AP transitions.com/ready. Perfect. So that’s really good for advisors who are looking to buy, if you’re on the sell side, you want to do succession planning, there’s different dropdowns for, for those services as well.