With advisory firm merg- ers and acquisitions at an all-time high, many of ourclients wonder if now is the time tomarket their firms for sale. The obviousfactors to consider in making this decision are whether the financial multiplesare in your favor: revenues, EBITDA,earnings before owners compensation,profit margins.
But other issues that come into play asbuyers evaluate the feasibility of a potential sale should be as important to yourfirm in preparing for a potential sale.
We have assisted firms throughoutthe United States for decades on suchM&A matters. I recently spoke with mypartner, and chair of our M&A Group,Rachel Lilienthal Stark, to discuss issuescritical to the M&A process.
First, if your compliance efforts are neither adequate nor up-to-date, your ability to attract a prospective purchaser willbe hurt. Diligent compliance processesprotect both your brand and the valueof your entity.
Also, because the value of an advisory firm is primarily based on thegoodwill of its relationships, the cli-ent-facing employees (both owners andnon-owners) will be the focus of anypotential purchaser’s inquiries. In fact,losing professionals who have significant client contact will adversely impactthe purchase price. It is essential toput strategies into place to preventthis — including restrictive covenantsand bonus or equity incentives.
Ironically, many firms think about
selling because they do not have an
internal succession plan. However,
Rachel cautions that owners who wait
until they are ready to retire to form
a succession plan can hurt a sale as a
potential purchaser will worry that cli-
ent relationships will not transition after
the owner leaves.
To attain the highest value for a sale,prepare ahead with both an internal andexternal succession plan (even thoughthe internal plan may not transpire).
Also imperative is that a firm’s clientcontracts are up-to-date, both from abusiness and legal perspective. Underthe Investment Advisers Act of 1940,with “potential” narrow arguments tothe contrary, any change of ownershipof 25% or more will result in a changein control, by regulatory standards, andwould trigger an assignment of theinvestment advisory agreements.
If your client contract requires written consent to assignment, any firm salewill require affirmative written consent from each of your clients, withoutthe potential ability to rely on negative consent. If written consent is notrequired, a “negative consent” (i.e., noaction taken by the client after noticeshave been provided of the proposedassignment) is potentially permitted,although we always recommend thatparties first attempt to obtain affirmative consent prior to relying on a negative consent provision.
TAX STRUCTURE AND BACK OFFICERachel advises that tax structure alsocan result in a change in the transactioneconomics. Because there is generally a“lookback” period to any change in taxstructure, it is too late to make changesif you focus on this at the time of a sale.Tax laws change. Thus, reviewing taxstructure — for both “day-to-day” andexit purposes — makes the most senseon at least an annual basis.
Most purchasers will focus on clientrevenue, but “back-office” issues canderail a transaction. These issues includeproblematic office leases and vendor contracts, litigation, poor bookkeeping andrecord keeping, technology and cyber-security issues, failure to protect yourname and other intellectual property, andliabilities not covered by insurance thatcould affect the potential purchaser.
Before going forward with a transaction, have professionals dig into theseissues in advance so you can addressany concerns rather than have surprisescome up by the potential purchaser during due diligence.
The sale of your firm can be oneof the most meaningful experiencesin an investment management firmowner’s life; therefore, be prepared toensure a smooth business transitionfor all parties.
Thomas D. Giachetti is chairman of theInvestment Management and Securities PracticeGroup of Stark & Stark, a law firm with officesin Princeton, New York and Philadelphia thatrepresents investment advisors, financialplanners, BDs, CPA firms, registered repsand investment companies, and is a regularcontributor to Investment Advisor. He can bereached at email@example.com.
THE COMPLIANCE COACH
By Thomas D. Giachetti
How to Prepare Your Firm for an Acquisition
Here are the red flags to avoid when readying your firm for that all-important
sale, especially if you want the right price.