If you’re thinking about selling your advisory firm, you’re not alone. Many advisors consider selling their firms for strategic or financial purposes. If done right, the sale can result in a life-changing outcome for the owners.
And as the population of financial advisors continues to age—the average age of U.S. financial advisors being 56 years old—this next step for many is closer than it may seem. It’s estimated that 40% of advisory assets will change hands in the next ten years.
But navigating the sale process as an owner is far from easy. In this article, we’ll cover what owners should know before and during the process to ensure a smooth transition and maximum value creation.
Market appetite for registered investment advisor (RIA) M&A
The last decade of M&A activity across the RIA landscape has experienced a substantial increase in terms of closed transactions and asset consolidation in the hands of a small number of large firms.
Deal-making activity across RIAs has increased due to strategic acquirers fueling growth through acquisition and private equity buyers eyeing the attractive return profile that RIAs can provide. In fact, private equity capital was behind 96% of deals in Q2 2024. RIAs can be extremely attractive acquisition targets given their inherent business characteristics—recurring revenue, strong client retention, and stable profitability.
A recent industry study, which surveyed nearly 500 M&A transactions with a median AUM of $400M found that the median EBITDA multiple for these firms was 9x EBITDA in 2023, up from 7x EBITDA in 2020.
Preparing to sell your firm
Your initial preparation begins years before you’re actively looking for a potential buyer. In order to approach the sale process with confidence, there are several steps you should take in the years leading up to your sale.
Define your goal
There are many possible outcomes when you look to sell your business. Your personal goals will determine the types of buyers you engage with and the terms you’re willing to accept.
Take time to decide if you want to keep the company locally owned, cash out for the maximum upfront payment, or combine resources with another company to expand your firm’s services. Your personal preferences will play a meaningful role in the way you approach discussions with prospective buyers.
Clean up your books
Before you sell your business, you must ensure your firm’s financial documents are well-organized, accurate, and presentable. Prospective buyers you’ll engage with during the sales process will scrutinize your financials. Buyers will also want to see a history of clean books, going back as long as possible and at a minimum of 3-5 years. It’s best to proactively organize your books before you need them.
Get in the habit of producing a clean income statement, balance sheet, cash flow statement, and investment performance data.
Document all company processes
If you’ve been running your firm for years, you likely have many standard operating procedures throughout your organization.
SOPs should be well-documented, including operational, compliance, and regulatory matters.
Be sure to define where your firm stores customer data and how that data is protected. Additionally, you should compile all firm compliance documents—including Form ADV filings, written compliance policies, supervisory policy, proxy voting policy, physical security policy, code of ethics, material non-public information policy, and business continuity and succession plan.
Archived client communications may also be subject to review during due diligence and should be easy to locate and review upon request.
While these requirements seem cumbersome, you likely already have most of this information in a single storage location. A simple confirmation that they’re available and easily accessible is worth understanding so you know you won’t be worried about providing the information during due diligence.
Find your mentors and deal team
Selling your business will be a team effort, one that, depending on the transaction, may require the expertise of an attorney, a CPA, and bankers.
The earlier you can start shopping around for your chosen deal team, the better. Though there are many service providers to choose from, it’s essential to build a deal team with direct experience with transactions similar to your business and your selling goals.
An experienced deal team is a meaningful asset in your selling journey. Your deal team will help you through the logistics of finding buyers and closing the transaction.
Having trusted mentors alongside your deal team can lighten the emotional burden often accompanying life-changing transactions like selling your business.
It may be that weeks have passed without a qualified buyer inquiry or never-ending rounds of feedback on transaction documents—a trusted mentor, particularly someone who has gone through a similar experience— is invaluable to maintaining a poised and patient approach during the ups and downs of your transaction.
How to increase the value of your firm
The valuation of your firm will rely on your company’s earnings, or EBITDA, and a multiple applied to your EBITDA based on your future growth potential.
By understanding which factors impact your EBITDA and valuation multiple, you can take steps to make your firm more attractive and valuable leading up to the potential sale process.
Automation and efficiency
Administrative tasks can quickly compound when running your own business. We’ve seen this first-hand as advisors spend 17 hours weekly on workflows unrelated to client activities or new business.
Your time is precious, and hours wasted on administrative tasks should be eliminated so you can focus on more productive tasks. Altruist solutions like digital account management, automated fee billing, and portfolio reporting can save you time and result in a leaner administrative team which may lead to higher EBITDA margins for your business.
Prioritizing efficiency can also increase scalability for the acquirer post-acquisition, allowing for higher EBITDA multiples as investors expect significant growth.
Lower custodian fees
If you’re leveraging many custodian features for your clients, these could cost you more than you think. It’s best practice to shop around for a custodian to make sure you’re getting the best deal for you and your clients.
The fewer fees you and your clients have to pay, the better your bottom line and your client’s returns will look.
Revenue composition
Recurring and diversified revenue sources are the holy grail for RIA acquirers.
Potential buyers like to see that they can reasonably forecast the expected revenue post-acquisition because your clients are on a recurring contract. Revenue forecasting helps potential buyers reduce some of their risk exposure, which makes them favor recurring revenue sources. Additionally, diversifying your revenue sources through niche, specialized service offerings brings more stability to your revenue mix and commands a higher valuation multiple on your earnings.
Client makeup
Just as revenue diversification can reduce the risk that new buyers face post-acquisition, a firm’s client composition can also introduce new levels of risk.
Potential buyers want to see a healthy mix of the number of clients your firm has—so that there’s no significant concentration risk among a small group of clients—and the average age, household income, and assets under management that each client brings.
These factors show potential buyers how scalable your firm could be post-acquisition as they plan to grow the company to new heights, as well as the possible synergies with an acquirer’s existing customer base if they’re a strategic buyer.
What to expect when selling your firm
Selling your firm can take anywhere between ninety days on the low end to six to twelve months for more complex transactions.
It’s important to have built strong relationships with your professional deal team, as you’ll spend many hours with them positioning your offer, vetting potential buyers, and navigating negotiations under contract.
As potential buyers express interest in your business, they’ll be asked to sign a non-disclosure agreement (NDA) to gain access to sensitive deal materials, like your confidential information memorandum (CIM). After prospects view your offering documents and have time to ask you and your team clarifying questions, or requests for supplemental information, they may submit a letter of intent (LOI)—a document that outlines the high-level terms of the proposed transaction designed to be the initial step in conducting further due diligence without shopping the deal around, known as “exclusivity.”
After you and the prospective buyer sign the LOI, extensive due diligence will take place, with buyers conducting a full review of your operating history, financial health, client composition, and other critical documents. The buyer’s deal team will also conduct a thorough review of your financial statements, known as a quality of earnings (QoE) report.
As the due diligence process continues, you’ll want to stay engaged with the progress of the buyer’s review and prepared to answer or supplement any additional questions they have for you.
If the buyers approve of the sale after their due diligence, transaction documents will be drafted for review with specifics of the transaction, including whether it is an asset purchase or a stock purchase.
Prepare for your future now
Selling your business is a pivotal moment meant to preserve your legacy, realize your hard work, and begin the next stage of your life.
By preparing for your future business sale, you’ll maximize your chances of transitioning on a high note and maximizing the business sale value to prospective buyers.
