34 INVESTMENT ADVISOR NOVEMBER 2019 | ThinkAdvisor.com
key threshold questions for evaluating
an acquisition target:
• What is the average age of the advi-
sory firm’s clients?
• What is the firm’s rate of de-accumulation?
• Which staff (including the firm
leaders) are likely to remain once
the deal is done?
• Which clients are at risk in the
• What has been the rate
of organic growth over
the past five years and
what drives this?
• What is our required
rate of return for this
This firm’s diligent analysis spawned an awakening.
They decided that building
rather than buying would
make more sense.
They discovered that solo
practitioners tend to use a multiple of
revenue as their valuation metric, primarily because they cannot demonstrate
free cash flow or EBITA after paying fair
compensation to the lead advisor. Being
savvy investors, the partners in this
wealth management firm recognized
that when nothing is left over after covering all expenses including compensation, it is impossible to amortize the
purchase price out of current earnings.
They also saw that many solo practitioners use a revenue multiple of 2.3x,
a mysterious formula that has become
common in the advisory world. Assume
that the practice generates $500,000
of annual revenue. At this multiple, the
practice would be valued at $1,150,000.
All of that would go into the pocket
BUILD RATHER THAN BUY?
of the seller. The buyers would still
need to spend time and money on
integration, branding, staff retention,
people development and a disciplined
client service experience. Fees gener-
ated from the book of clients acquired
would help fund the purchase price,
but the ROI would be meager because
of the associated costs and the demo-
graphics of the client base.
By focusing on achieving critical mass
in each of their existing locations
through recruitment and development,
the wealth management firm realized
it would have more control over the
process and every dollar spent would be
an investment in their own firm rather
than a payout to someone who was not
likely to stay with the enterprise for
To build rather than buy also requires
an investment, of course. This is especially true in firms that do not have a
framework for organic growth.
In weighing your options, first consider what type of firm you want to be and
define your optimal client. This helps to
inform the future staffing model, the client experience, the technical expertise
required and the development program.
Second, decide how to become an
employer of choice. Most new hires will
not remain fulfilled in an office managed
by a solo practitioner who has no experience or desire to train them. Successful
firms assign accountability for managing
and developing employees, and structure
compensation to promote a more team-based approach to business. The CFP
Board Center for Financial Planning has
developed a guide, Financial Planning
Career Paths: Building More Sustainable
and Successful Businesses, for creating
this type of structure.
Because our example firm has mul-
tiple locations, they must think in
terms of office-by-office growth rather
than attempting to develop each loca-
tion simultaneously and straining lim-
ited resources. They also need to build a
structure and a culture that truly lever-
ages organic growth. It is a shift in
focus. In an acquisition, buyers consider
issues like synergy, cost savings, align-
ment of interests and other factors. In
an organic growth strategy,
however, the owners start
with a clean slate and build a
business based on their own
vision rather than attempt-
ing to cobble together the
conflicting interests of mul-
Regardless of the decision
to buy or to build, growth is
daunting. Purchasing a firm
may seem more expedient,
but the costs in time and
money are significant and the practice
and cultural conflicts are real. It takes
a bit longer to create a firm organically;
it requires patience and a well-thought-
out structure and management strategy.
If you are a reasonably-sized firm
attempting to grow, you already have
processes for hiring, rewarding and
developing people. You have processes
for attracting new clients and providing
advice. You have standards of care and
quality, which you can leverage. While it
is not an entirely new recipe, the compo-
nents must be scaled up in order to grow
at a rate faster than the average firm.
Neither approach is mutually exclusive.
Decide what type of business you are trying to create and where you want to be
located. Then figure out what will produce
the most appropriate ROI for the risk.
Mark Tibergien is CEO of BNY Mellon’s
Pershing Advisor Solutions. Tibergien is also
the author most recently of “The Enduring
Advisory Firm,” written with Kim Dellarocca
of BNY Mellon and published by Wiley. He can
be reached at email@example.com.
In weighing your options, consider
what type of firm you want to be
and define your optimal client. This
helps to inform the future staffing
model, the client experience, the
technical expertise required and
the development program.