What does the principal of a successful RIA do when he is likely 5 years away from partial or complete retirement and the appropriate successor for his/her business has not yet been identified?
The answer can be relatively simple if the person that he believes is strong enough, capable enough, visionary enough, and respected enough works for the firm now. However, in too many cases the solution is anything but simple, primarily because the soon-to-be-retiring principal has not identified –nor groomed – the next gen.
So what happens when there’s no “Mr. Right” or “Ms. Right” at the ready?
- A business that has not solved for succession and, most importantly, moved business development beyond the sole purview of its principal, will have a much diminished overall enterprise value.
- Your legacy is unprotected.
- Your clients are left wondering what happens if you are hit by the “proverbial bus”.
There are multiple paths that a principal looking to solve for succession can take:
RECRUIT or ACQUIRE: The market is ripe for this now. The notion of recruiting an advisor who has a book of business, or acquiring an established practice, can be quite attractive and accretive.
Pro: Allows principal(s) to retain complete control and to groom successor in his own image.
Con: It is a highly competitive marketplace and every RIA and traditional brokerage firm is looking to recruit or acquire from the same talent pool. Unless you are prepared to offer a good amount of cash up front to a recruit, and an aggressive multiple to a seller (with a deal that has at least 30% in cash up front plus equity for the remainder), you may find yourself quite frustrated – and likely empty-handed – for much longer than you would like.
MERGE: Joining forces with a likeminded and similar size firm can be a good way to add capacity and hopefully a successor.
Pro: The principal of each firm retains his voice and control (presumably 50% of the whole).
Con: Typically, in this scenario two imperfect firms come together, but do not solve for much more than growing the asset base of each. While a merger may identify a successor, if it doesn’t allow you to gain scale, bench strength and capacity, access a more solid infrastructure, and greater brand identity, then it likely isn’t a deal that would be accretive enough. And, as is most often the case, the principal of the firm you are merging with simply isn’t up to the challenge of running a much bigger firm—that is, the combined entity.
SELL: Selling all or a portion of your equity to a larger enterprise—one that has solved for the above can be a real needle mover.
Pro: The ability to plug into an already established infrastructure and offload all of the minutia involved in business ownership – and focus just on what you love to do most – can not only be freeing, but also create much greater efficiency and a superior service model. Also, as the saying goes, “a rising tide lifts all boats” to become part of a larger entity that has already solved for the things that most impact enterprise value means that the value of your business just rose exponentially.
Con: The larger the firm that acquires yours, the more likely it is that you will lose your voice, autonomy and, certainly, your brand. Also, cultural fit is tantamount because you will be adapting to the acquirer’s way of doing things.
Finding that perfect “mate” – that person you expect not just to spend the rest of your working life with, but to leave your life’s work to – means keeping your eyes and ears open and investigating all options, none of which are mutually exclusive. To continue to sit alone at the table and do nothing is a decision in and of itself—and a poor choice at best.