Done Deals, Big Deals: Real Deal Pitfalls for Sellers to Avoid

Authored by: Jeff Nash, Founder & CEO, Bridgemark Strategies

The cast of characters occupying the wealth management space continues to grow: From private equity, institutional investors, aggregators, consolidators, and RIAs (mega to boutique) to solo practitioners eying an exit from the industry and next-gen advisors looking to make their mark. The exciting part: There’s room for everyone in our dynamic industry. And the variety and pace of industry deals is proof positive.

What’s driving the deals? And, equally important, how will today’s deal terms – often nuanced – impact our industry 10 or 20 years into the future? Both buyers and sellers approach the table with their own agendas, and the successful ones are those who enter negotiations with a clear sense of what they are trying to accomplish.

For buyers, the end goal can include some or all of the following:

• talent acquisition
• access to new markets
• revenue growth
• product/service enhancements

For sellers, the “why” bringing them to the transaction might be tied to non-business-related events such as divorce-driven cash flow concerns, illness,  personal  might be:

• liquidity/monetization
• succession
• scalability
• technology improvements
• back-office service enhancement

What is for sale … and at what cost?

While sellers who come to market for liquidity or monetization purposes do have a clearly defined goal, operating with tunnel vision and focusing solely on this aspect of the deal can be detrimental over the long term. For example selling a percent of revenue – with no other strategic benefit – is more often a boon to buyers and a bust for sellers. Yes, you get a cash infusion and retain complete operational control of your business; but structuring a deal that includes other benefits (e.g., equity in the purchasing firm, a succession plan, a right of first refusal on upcoming deals where a potential competitor is selling near where you are operating, etc.) can help future proof your business and financial stability.

Plus, it’s important to remember that revenue is not profit. As profit margins compress, the contractually agreed upon revenue share – which remains constant – represents a larger hit to your bottom line. In short, the revenue share figure is constant while profit varies.

Math-oriented individuals can calculate the equity-share equivalent represented by a  revenue share percentage in any given year. But the figure will change during each period covered.

Is selling a percentage of your RIA’s revenue different in name only from selling equity in the business? Yes and no: while the math will math, the risks associated with revenue sharing vs. equity ownership differ. These risks will impact deal terms.

All deal scenarios are different and deal terms will reflect tangible and intangible assets, production, revenue sources, client base and myriad other elements. How much up-front money does the seller expect, and how much control does the seller want to retain? What percent of revenue will the buyer provide to the seller going forward and how will sellers who remain active in the practice be rewarded for meeting or exceeding growth projections? Also impacting the deal: how badly the principles want to execute the transaction.

It’s all a balancing act with a lot of moving parts. Sellers unfamiliar with the deal-making process – and most are, having either never entered into such negotiations or only done so sparingly – can optimize their position by consulting with an independent expert well versed in the process. Protecting your interests today and well into the future is imperative. One miscalculation can be an expensive lesson in the complexities of recruiting and M&A in today’s wealth management ecosystem.