Not ready to retire? Consider the sell-and-stay approach

The current M&A market for registered investment advisers remains red-hot as top firms continue to fetch lofty valuations, thanks in part to the influx of private equity money. According to a report put together by Echelon, there were 150 transactions through the first three quarters of 2019, a number that will likely exceed 200 after data for the full year is compiled. 

Amid this flurry of deal-making, aging demographics continue to haunt the industry, with the average financial adviser now more than 50 years old, research firm Cerulli Associates estimates. 

These parallel trends have put some founders/owners of RIAs at a crossroads, forcing them to mull whether it makes sense to sell their business — even though they have no desire to retire in the near term, nor any idea what they would do if they did. 

The fear is that the current market could turn. Were that to occur, many would second-guess themselves for not seizing the opportunity to cash in on a favorable business cycle, knowing that it could take several years for a similar environment to reemerge, at which point they will be much older.   

The possible solution is the sell-and-stay approach: 

Sell. Consider selling your firm to a buyer with established management, leadership and back-office functions. If you are like most founder/owners, you may loath many of the day-to-day compliance, operations and human resources responsibilities that are inherent in running an RIA. This option allows you to hand off those burdens to someone else.

Many of today’s most active buyers already have in-house IT, CFO, HR and operations professionals on staff, meaning it’s viable for them to easily incorporate these core administrative aspects of your business into their own. 

Stay (and continue to do what you do best). As part of the sale, carve out a position that allows you to stay active in the areas of the business that you do in fact enjoy. That could mean getting back to your entrepreneurial roots by focusing your energies on business development or alternatively concentrating on servicing a subset of top clients.  

This sort of deal should include performance incentives and allow you to maintain some equity. Most buyers not only would be open to this type of arrangement, they’d likely welcome it, appreciating that an active founder/owner would help with business continuity and client retention.

Also be sure to negotiate a piece of the pie for second generation advisers. Doing this increases the chances they’ll stick around, which would alleviate continuity and retention concerns — not to mention providing an added motivation to see the business succeed.  

Obviously, not every RIA owner/founder or business is a candidate for the sell and stay approach. Yet, for those who are, it can be a terrific way to have your cake and eat it too – allowing you to relinquish the functions you don’t care for, while taking advantage of the current market dynamics and mapping out your retirement more on your own terms.

[More: Veteran adviser locks down a succession plan that lets him stay involved]

Carolyn Armitage is managing director at Echelon Partners, a Manhattan Beach, Calif.-based firm that provides M&A advisory, valuation, consulting and investment banking services to RIAs.