Martin Luc Derome decided to “push away the tire kickers.” The chief executive officer of Queenston, a Winnipeg-based advisory that specializes in book-of-business and merger-and-acquisition (M&A) transactions in wealth management, now charges a fee for would-be buyers to access detailed information about individual sellers listed on its platform.
“We could sell like 20 books a day, if I had 20 books a day,” Derome said. “We have so much demand.” Previously the consultancy got 10 to 12 offers per listing — even that amount was difficult to manage.
Analysts are predicting an increase in M&A activity in the wealth, and to a lesser extent, insurance advisory business this year. As interest rates have come down, the pent-up demand among buyers looking to scale up is expected to result in both firm-level deals and individual practice purchases.
It is a seller’s market. Advisors looking to take advantage need to prepare carefully. Price matters, but so does a range of additional considerations, according to consultants and advisors in the business.
Outsized multiples
In a competitive market, it’s a given that buyers need to offer a good price and show that they can finance the purchase.
Derome, who’s been in the business for 15 years, said multiples are the highest they’ve been in several years, with many books fetching three to four times gross recurrent revenue.
“It depends on the terms, depends on the conditions, depends on how well [the business is] managed,” Derome said. “If you’ve got $50 million of assets under management and you have 2,000 clients, that isn’t worth much. But if you’ve got $50 million and you have 50 or 60 households, that’s worth a lot.”
Mark Toren, founder of Toronto-based consultancy Toren & Associates who’s been in the business for over 30 years, said the typical range in value is lower, at 1.5 to 2.5 times revenue.
Both agree however that advisors who sell within their firm will see a lower multiple, simply because there’s less competition.
Buyers should also be aware that if they finance the purchase through their firm, they won’t have the freedom to switch firms until it’s paid off, Toren said.
“You’re locked in for the period of time that that loan is given to you, and typically that loan period is five to seven years,” he said. “If you get independent financing, third-party financing, then legally, technically, you’re not locked in. You can walk out at any time.”
Joe Millott, founder of Toronto-based wealth management advisory Acquatio, said younger advisors are also at a disadvantage because the industry doesn’t provide sufficient training and development solutions to set them up for success.
They also generally lack the capital older advisors have, and may not yet have an established reputation.
“Those advisors are finding it hard to scale their practice up,” Millott said, adding that the lower end of the market — practices with under $100 million in assets under management — is a competitive space.
One way for first-time buyers to get their feet wet is to buy a smaller book of $15 to $30 million, to gain experience with the onboarding process and to understand what resources they would need to make a larger purchase down the line, Derome said. In fact, he said he’s seeing more small transactions, where an advisor can buy a segment of a book of business amounting to 25 to 100 clients for a more affordable price.
Millott also says he “strongly” disagrees with the idea of charging prospective buyers a fee, as Queenston does.
“When a seller hires our firm, part of the fee they pay covers our due diligence in curating a qualified buyer list. As a result, our buyer pool is intentionally small, consisting of experienced practice owners with the financial capacity to close deals,” he said. “We would never charge both buyers and sellers, as that would create a clear conflict of interest.”
The right match
Fit encompasses a whole range of factors, including investment style, business model, values, client preferences and personality. Consultants and advisors alike say the importance of a good fit shouldn’t be underestimated.
Unless they must sell immediately for health or other reasons, most sellers will stay on for a transition period of anywhere from six months to five years. So, it helps if both sides not only share values and investment approaches, but also get along.
In one case, Derome said he advised a buyer who disliked the seller not to go through with the purchase. The buyer told him, “‘Yeah, but he’s got a hell of a nice book. I’ll manage with them for a year.’” Six months later, Derome said, “it was a war, and they called me and said, ‘can you help to undo the transaction we did?’”
Even within family practices, the succession plan isn’t necessarily set in stone. Darren Ryan, a partner at Ryco Financial Inc., a family practice in St. John’s, Nfld., started working there when he was just 23. At the time, his father told him he would have to work alongside him for “’at minimum two years to see how you’re working out before I’ll even consider you — son or not,’” Ryan said. “He made it very clear from day one, he wouldn’t consider selling his business to anybody unless they proved themselves in the business first.”
Situations where the senior advisor has an internal successor in mind tend to work out best, he added. “Finding someone externally to buy you out doesn’t have nearly the same success rate. And how do you measure success? Typically, it’s client retention.”
That’s why it’s important that retirees choose their successor, instead of having their firm control who buys their book, said Christine Timms, who’s written several handbooks for advisors including one on succession.
“The reality is, for any transition to be smooth, the two have to have confidence in each other and have to kind of like each other,” she said, “and that’s more likely to happen when the advisor is in control of who is chosen.”
Timms, who sold her book to two successors and retired in 2016 after more than 30 years in the business, said advisors want to ensure their former clients are well-served. “We care about our clientele. We want to know they’re well taken care of. We don’t want to be afraid of running into them on the street and have them tell us that the person we passed them on to blew them up. This is people’s retirement money.”
Sellers should also be able to articulate their business model to ensure there’s a match, she said.
Other “soft” factors can give buyers an edge. Sometimes a seller chooses a bid that’s not the highest because they liked the buyer more, felt the buyer would best protect their legacy, agreed to keep the branding for a certain period or committed to keeping personnel on staff, Millott said.
“Those are soft things that you might not think would be as important to a seller if the price is not right,” he said. “But actually, we found that those do really move the needle.”
Buyer be ready
Beyond finding the right match at the right price, buyers should plan carefully to ensure they have the resources to onboard their new clients after the transition is completed and the seller leaves. That means having adequate staff, procedures and processes in place.
“Be ready. Prepare yourself. Know everything about your business,” Derome said. “Know your numbers, your structure to onboard new clients. Are you ready for that? Do you have the team? Do you have the staff?”
Ryan, who now runs Ryco with his brother since their father semi-retired, said the family practice has been offered five books of business to buy in the last three years. But they knew they wouldn’t be able to handle the increase in clients and still serve them to a high standard.
“We’ve had to say no every single time, because we don’t have the capacity.” he said. The books were owned by sole practitioners and didn’t come with additional staff, he noted, adding the firm is swamped with its own growing client base.
But they are planning for further growth in the future and know exactly what they need to do to get there. “Part of our big picture, 10-year plan is hiring more junior associates to build a deeper bench so that when the time comes and these opportunities arise, we will be able to be in a better position to service clients,” Ryan said.
This article appears in the February issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The online version of the article has been edited.