Only the biggest RIA firms sell for cash, says a noted expert in the advisory M&A field. Everyone else ends up financing the deal over a few years while the new owners find their feet.
David Grau of FP Transitions recently told Financial Planningthat unless a firm brings in more than $3 million a year, its founder will probably have to receive his or her buyout in installments -- and will in any event usually end up selling to a junior partner willing to take over the business.
Part of the issue here is that most RIAs still derive most of their value from the client relationships that the founders have built and maintained over the years, which makes them difficult for outside sources of transition financing to evaluate once the original advisors are no longer part of the equation.
Once again, this is a powerful argument for the importance of building a business that can go on without you at the center. Advisory firms that have processes in place -- a manual, a training routine, some kind of unique system or routine -- regularly earn much higher acquisition premiums than the firms that only have their accounts to sell.