My guest on today's podcast is Jessica Polito. Jessica is the Founder and Principal for Turkey Hill Management, a mergers & acquisitions consulting firm that assists financial advisors with the sale, acquisition, integration, or merger of their firms.
What's unique about Jessica, though, is how she has built a practice helping financial advisors and their firms navigate the intricacies of buying, selling, or merging their firms by deeply understanding their business expectations, educating them on the transaction process, valuing their firm so they can get the best deal for them, and guiding and providing counsel to them through the transaction process… while doing so without the conflict of an investment banker’s success fee.
In this episode, we talk in-depth about how Jessica leveraged her investment banking experience in wealth management mergers and acquisitions to build her own business where she could provide more independent M&A advice, why and how Jessica developed her flat-fee advice model for mergers and acquisitions to, similar to the evolution of fee-only RIAs, be able to demonstrate that her services are not incentivized by just getting a sale at the end and that she is truly providing advice she feels is best for her clients, and how Jessica helps her advisor clients parse through a seemingly overwhelming number of potential buyers and understand how to negotiate the terms of their agreements so that they can find the right deal for them that aligns with their business goals.
We also talk about why Jessica cautions her clients and advisors considering selling their firm to not base their asking price in comparison to the purchase price of other firms as without context on how the price and more importantly the terms were decided, why Jessica counsels that advisors who want to retire in 3-5 years need to start not just preparing for a sale but actually beginning the transaction now (because it can take several years to finalize a deal and wind down the post-sale retention contingencies), and why Jessica feels advisors considering a sale in the more distant future should actually spend less time trying to go through the laundry list of updates to their firms to extract the top value and should instead focus on simply doing what is right for their business that keeps it on a healthy growth track (because that is what will make their business most attractive, whenever the time comes to sell).
And be certain to listen to the end, where Jessica shares why, because she works on her own, she is intentional about the number of clients she works with at any given time so that she can both provide dedicated service and preserve time to spend with her family, how Jessica dealt with imposter syndrome and the fear of being compared to larger institutions with longer histories by investing into developing and sharing her own thought leadership through podcasts, videos, and conferences, and why Jessica defines success differently for her professional and personal lives in that professionally, success is a moving target (because she feels that without new goals she may become complacent and limit herself), while personally, success is continuing to build her business (especially in a male-dominated industry) and take chances so that her children can see that she kept trying even if that meant she might fail, and ultimately that she made something she is proud of.
So, whether you’re interested in learning about how Jessica helps advisory firm owners sort through the ‘noise’ of different proposals to find viable potential deals, how Jessica discerns when to use an EBITDA or a revenue multiple to value firms or practices, or what other ‘fine print’ Jessica feels is important to understand before engaging in an M&A deal, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Jessica Polito.
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Michael: Welcome, Jessica Polito, to the "Financial Advisor Success" podcast.
Jessica: Thank you so much for having me.
Michael: I'm really excited about today's episode and getting to, I guess, nerd out a little bit on mergers, acquisitions, buying firms, selling firms, all the different ways that advisory firms are kind of changing hands and ownership these days because, to me, it's an interesting dynamic from the advisor end. Most of us spend our careers, kind of our working lifetimes, building these advisory businesses. They can have very substantial economic enterprise value and you really only get one chance to sell it and do it right and that also means kind of by definition, basically everybody who sells an advisory firm has never done it before. So really important lifetime investment, high-stakes, zero experience, to me, basically sets not the best environment for making good decisions.
Jessica: No pressure?
Michael: No pressure at all. And then you get thrust into this world of investment bankers and deal-makings and term sheets and LOIs, and M&A just kind of has a jargon of its own. So, I think today, I don't know, my goal and excitement is to just get to demystify that end a little. I know you work in that domain; you've come from an investment banking background. You have what I think is actually a very interesting not technically investment banking but consulting for advisors kind of structure to helping advisors through this and, to me, it's just a good opportunity, I hope, to help more advisors understand just how all this stuff really works. So, maybe as you go into this for the first time and only time that you may be selling your business, you're not going in totally, totally blind and struggling in trying to figure out how to do it right.
How M&A Advisors Can Help Navigate Buying Or Selling Proposals [05:34]
Jessica: Yeah, that is kind of outside of my day job, right, that is kind of my goal is really kind of removing the gatekeeping aspect of M&A. It's funny when I get a new client who's like, "Well, I have no idea what I'm doing. I've never done this before." And I'm like, "Yeah, of course you don't. That's why you're hiring someone to help you. You know, it's the same reason that I don't manage my own assets. There's a whole separate jargon and understanding that comes with doing your day job and that's why people hire you to do what you do. So, there's no expectation or there shouldn't be an expectation going into a transaction that you know what you're doing.
The advisor's job is to represent their company as best they can, which they should, right? You should be proud of the business that you've built, and you should really care about your employees and your clients and when it comes time to sell your business, you should be able to find an advisor who knows what they're doing, understands the industry, and cares about you the same way that you care about your clients. So, I'm happy to educate the public as much as possible on what does the sale process actually look like. What is an EBITDA multiple? And when I hear that my neighbor got 18 times for their business, what does that actually mean? And how should I position myself best for sale or how do I know if the time is right? Or any of the other hundreds of questions that go through successful founders' minds before and during a sale.
Michael: So, I think I'd love to just start right there. If I'm an advisor and I'm approaching that point of I think I may want to sell this thing, I'm kind of getting to the point where I know it's valuable, just don't really know if I want to keep doing this anymore. Business has gotten complex. I don’t really do all the things I like to do anyways because there's more people and stuff I've got to deal with. Maybe I'm ready just to be done with this and sell it. It seems like there's a lot of buying activity and I really never thought the business was going to be worth as much as I kind of hear it is if I apply some industry rule of thumb multiples. I think it might be time and I literally don't even know where to start. Do I just look up some of the big firms in the industry publications that buy and call their 1-800 number and be like, "I'm thinking about selling. Can you connect me to the people who write buying checks?"
Jessica: "I need money, please."
Michael: Where do you even start?
Jessica: Well, I would say probably what not to do is exactly what you said. And I guess there are a few reasons. One, if you are dealing directly with a buyer, especially a prolific buyer, right, one that you've probably heard about in the news and that's why you know the name, or it's one of the major aggregators whose names you've heard over and over again, they're deal machines. Right? And obviously they're deal machines because they have a compelling story and a great growth story and they're very good firms. But they also have standard templates and a way that they do deals.
A lot of the terminology and jargon that go into deal-making are, as we just said, unfamiliar to your average entrepreneur. And without knowing what to look out for, or what's market, or just industry standards, it's easy to...I was going to say be taken advantage of, but I think that's even too strong of a word because it is not a buyer's intent to take advantage of a seller, right, but...
Michael: It's not necessarily nefarious but just you are… It's a good point. You are putting yourself into an environment of, "So just to be clear, you have all the money, I want the money. You've done this lots of times. I literally have no idea what I'm doing. Let's have a fair negotiation."
Jessica: Well, not even that. Right?
Michael: Probably not going to work out in the best of contexts.
Jessica: Yeah, it'll work out. It just won't necessarily be perhaps what the person next to you was able to get. And not even from an economic standpoint. If they say, "Well, our standard is to have a five-year non-compete tail on your employment contract once you leave," and if you're like, "Well, okay, if you say it's standard, it's standard," and then you find out that someone else negotiated it down to 1 year and you're just like, "Oh, shoot." You know? So, I think that's kind of like one-off. Right? And then I think where some people find themselves in a real pickle is when they start negotiating more than 1 at the same time. They're like these 3 firms have been calling you over and over again. One of them is a huge aggregator. One of them is my neighbor. One of them is a firm that I heard of that sounded interesting, so I reached out to them. And they're running their business, they're managing their clients and their relationships. And on top of that they're also trying to solicit proposals from more than 1 firm and they're like, "I don't have enough time in the day. I don't understand what I'm doing. I'm completely underwater and help. This firm wants me to sign a LOI, but I haven't even met with another firm."
So, sometimes it's helpful to just bring in an advisor just to help streamline the process and herd the cats, even if you've already started having conversations on your own, just to kind of have a person whose job it is to take that off your plate and make it manageable and help you digest everything that's being thrown at you when you're like, "I don't know. I think I already signed an NDA with this 1 firm and I've provided financials but I actually don't think I signed 1 with them." It becomes a lot to have to take on by yourself, having never done it before while also doing your day job.
Michael: To me, you raise an interesting sort of point and context around this as well, which is for a lot of advisory firms of any particular size, as much as I sort of jokingly highlighted, "Well, I guess I can look up popular buyers online and get their contact information on their website and call them," in practice, there's so much buying activity, the overwhelming majority of advisory firms I talk to that have anything north of a few hundred million dollars under management in particular, are like, "You know who the people are because they called you and emailed you already.” The buyers are searching so hard for deals that a lot of advisory firms are already getting inbound interest or inbound nibbles like, "Hey, if you're ever thinking about selling, here's my contact information. Give me a call."
Jessica: The interesting thing is that it's become so competitive, and owners have become so inundated with inbounds that it almost, to several sellers that I've talked to, has just become almost like white noise. I was talking to someone the other day who was like, "Let me read you the names of the firms that have emailed me this week." They're telling me and they're like, "I don't even know which one of these is an investment bank, which one is private equity, which one is a buyer. All of them are just emailing me trying to get me to respond to them and I don't even know what conversations I'm supposed to be having with them. Which ones are going to pay me? Which ones do I have to pay? There's so much out here I just ignore all of it because it's too much." This goes to a whole broader conversation that I don't think we're having today, which is as a buyer, how do you stand out from the crowd because sellers are so overwhelmed with all of the inbounds, plus the news articles, plus the conferences and everything else that they're...the touchpoints, right, that, yeah, even if you know who the players are, you might not actually know who the players are. You know what I mean?
How To Discern If A Proposal Is From A Buyer Or An M&A Advisor [13:55]
Michael: Yep. Yep. At just some point they all kind of sound familiar, I've heard all these names. In the vein of what you said though, maybe we can even just help take a moment and just demystify that. So, when you're getting...there's PEs and there's family offices and there's aggregators and there's other local buyers and there's investment banks and all these people reaching out, it's like, to your comment, it's like who pays me and who do I pay? Can you just unsort, or I guess sort those different categories for us for folks that just aren't familiar with all these different labels?
Jessica: Yeah, I think they fit into 2 broad categories. Right? So, an M&A advisor, whether it's a consultant, an investment bank, you're paying them. You're paying them to help you with the sale of your business. And then everyone else, the people down the street, the private equity firms, the integrators, the aggregators, the larger wealth management firms that might be reaching out to you, they want to buy your firm, or they're interested in having the conversation to see if it makes sense.
Michael: So, when I get a PE or RIA aggregator name, I know that that's a deal they literally want to buy me directly. If I’m getting some outreach from so-and-so at an investment bank, they don't actually want to buy me. They want to represent me for sale.
Michael: They want to shop me, they want to get me out there.
Jessica: Exactly. In very broad terms, right? The investment banker wants to understand your business and see if it makes sense for you guys to work together and then understand have you already had conversations, what's your appetite for going out and talking to 5 firms, 10 firms, 20 firms, 40 firms, I don't know.
Michael: That kind of sounds exhausting.
Jessica: It sounds exhausting. And then on the other side, right, the private equity firms for some of the larger firms, and then the larger wealth management firms, insurance companies, whatever, want to have a conversation with you to understand if you could possibly be a good fit as an acquisition target for them to buy you and have you be part of their organization.
Michael: So, can you help us understand that buyer landscape then a little bit further? You're kind of mentioning aggregators and insurance companies and PE firms. And I know in practice they do show up a little bit differently both in terms of buying and just what they want to do and what it looks like after the sale. Can you help us just understand a little bit more these subcategories of buyers that are out there today?
Jessica: Sure. So, private equity tends to invest in larger organizations if they're doing a direct investment. So, they will likely target firms with a handful of a billion under management plus. And they're usually going to take a minority stake in the business, sometimes majority. And primarily what they're looking to do is infuse capital into your business to help with growth. So, whether that is to help fund acquisitions or do internal investments in your technology or your marketing, or to make some key hires, sometimes they'll help if there's a founder who needs to take some chips off the table or whatever. But really, their goal is to come in and grow the business and then whatever their time horizon is, whether it's 3 years or 5 years or 7 years or longer, eventually make a profit on the business for themselves and for their investors.
Michael: So, there's a good thing I think that you highlighted there from the PE firms end because they want to infuse capital into the business to help with growth because they want it to grow a bunch over their 3-, 5-, 7-year time horizon, this tends to be less about, I'll put in air quotes, just cashing a founder out who wants to take chips off the table. It sounds like that might be part of the deal but that's not the center of the deal if you're talking to a PE firm.
Jessica: Typically. It could also be they're helping to bring in next gen, right, who maybe can't afford to buy out the founder, right? Who are very capable and have all of these plans for growth in the future but just literally cannot pay for the equity that the founder is trying to get rid of because the company is too valuable. So, that could be an example where they are, I guess, technically helping someone take chips off the table, but it is, you're right, for kind of like a greater good, which is to help grow the company. And in this case it would be help grow the company by bringing in next-gen who can fuel the future growth of the business.
Michael: Okay. So, that's the PE domain.
Jessica: That's private equity. Okay, so now I guess that helps the launching pad for a handful of the other conversations. I assume a lot of your listenership knows, and maybe not, private equity has been very active in the wealth management space over the past few years. So, what that has done is it has created a larger pool of buyers who now have money from private equity to go out and do acquisitions. So, some of these are aggregators and some of these are integrators. I think that might be the next best place to go.
So, integrators are firms that purchase other RIAs and, as the term might imply, integrate them into their business. They'll take over their back office. Sometimes they'll take over their investments. They'll take over everything that you did not start your business to do. Right? They'll run your payroll. They'll make sure that your insurance plans and 401(k)s are going the way that they're supposed to. They'll help with marketing. And they'll really kind of leave you to do what most wealth managers want to do with the majority of their time, which is serve their clients. And some or many or the majority of cases bring in new clients in a way that they couldn't before because they were so busy doing their quarterly filings and talking to the guys at Addepar to make sure that their subscription isn't too expensive or whatever. Right?
And then on the other side, you have aggregators who will buy companies either 100% or not and kind of leave them alone for the most part. They'll take over cybersecurity and compliance, things to make sure that no one gets in trouble. Right? But they will let them continue to run their business by-and-large as it was before. But they will provide them with assistance on future acquisitions or succession planning or hiring needs or whatever it is that the firm couldn't really do on their own that made having a parent company look attractive to them.
Michael: So, in an aggregator end, especially if they may be buying as much as 100%, this feels like the founder wants out and probably isn't continuing. There may be some successor leaders who can take over clients and/or manage the practice but they don't necessarily have the financial wherewithal to buy the practice. So, we're going to have an aggregator who writes the check that the founder needs but leaves the business largely kind of whole and intact for the successor leaders to continue to run the firm and grow it from there. Am I thinking about that well?
Jessica: Yeah, it could be the case. It could also be that the founder is 50 and has done really well and just doesn't have the capital to reinvest in the business to take it from 500 million to a billion or a billion to 5 billion or whatever and just kind of needs a parent to help them with economies of scale and the technology front or doesn't have a next gen but the parent company has an amazing recruiting team. There are so many different reasons why an aggregator or an integrator or private equity could be an interesting solution for a seller. Unfortunately, there's not a very easy way to say, "Okay, well, if you meet these 3 criteria then this is the buyer for you." That would make our job a lot easier, but...
Michael: Yeah. I'm just trying to figure out general contours though. Right? Because some of that gets to that nature of that...an aggregator, they'll buy the equity, but they tend to leave you alone. So, in circumstances where you want to sell the equity, but you still want to otherwise kind of hang out on your own. And I contrast that out to integrators, right, it's like where am I likely getting an integrator just wanting or willing to get integrated? Either I'm an advisor who doesn't really want to do all the business stuff anymore, I just want to get back to the client things that I liked in the first place, but I've got some time risk. It's not like...I'm not trying to exit my career. I'm not trying to retire. I may be happy to continue but either I don't want to manage all the business-y stuff anymore, I want to get back to clients and maybe take some chips off the table. Or I'm ready to exit entirely and the reality is there aren't people who can keep running this without me. Maybe I've got a good team that does the doing things and the client-serving but there's not a next line of leadership there, so if I'm leaving, I really have to sell and integrate into something that can create that systems and infrastructure that my firm wouldn't have after I leave.
How To Review Proposal Conditions And Align Them To Deal Expectations [24:21]
Jessica: Yeah, I think that's well-said. But I think since we're talking about cases where a founder wants to step back, I think it's important to lay a foundation of what step back actually means. If you're contemplating retiring in the next 3 to 5 years, this is the time to sell your business because as soon as you hit go on a sale process, it takes several months to sell your business. Right? So, if you're 60, you'll probably sell your business close to your 61st birthday. And then a buyer is going to want you, assuming that you have the majority of the client relationships, to stick around for at least 2 years but probably more like 3 to make sure your clients have been transitioned appropriately. Because if they're going to pay you all this money for your business, which is there are no assets, right, it's just relationships and they're going to pay you maybe the majority of the worth of your business upfront, they're going to want to make sure that they get what they pay for.
If you sell your business and you walk away 4 months later, your clients are going to be like, "I have no idea what just happened but if the guy that's been managing my assets for the last 25 years is walking away, I probably should too." They're going to want you to stick around, they're going to want your clients to feel comfortable. They're going to make sure that whoever it is that you're transitioning your relationships to has sat in on several quarters' worth of meetings and is now starting to answer the phone when your clients call and, as every advisor knows, it takes time to build a relationship and to build trust. So, if you're selling your business, if you're thinking about selling your business at 60 because you want to retire, you're probably not going to retire until 64.
Michael: Okay. Thus, if you want to retire in 3 to 5 years, you should be starting the process now because you need to recognize the time it takes to do the deal and how long a buyer's likely going to want you to stick around the other end to really make sure clients transition. Or because you're going to have a contingency that you don't get the full payment until and unless all the clients transition, which means you will want to stick around to end of that contingency period.
Jessica: So, yes, from an economic standpoint, that's 100% right. So, most buyers do not pay 100% of deal value upfront. There are 2 ways to ensure that they are, as I was saying, kind of getting what they're paying for. The 1st would be a retention payment, which tends to get paid at the end of the 1st year, give or take. And that truly is taking a look at a list of clients that exited when the deal closed and taking a look at how many of them are still there a year later. And assuming that the vast majority of them are still there, which they often, often, often tend to be, then you receive another slug of the deal value.
The other, and these are not mutually exclusive, though sometimes they can be, is an earn-out. And those are based on growth and those tend to be 2 or 3 years out after a deal closes, which basically says if you can hit this hurdle, you're going to get X dollars. If you can hit this growth hurdle, you're going to get Y dollars. And if you hit this growth hurdle, you're going to get Z dollars. So, it incentivizes the advisors not only to stick around, but to continue growing their business the way that they had before they sold the business.
Michael: Well, and I think that, to me, that's a good spot to highlight because just these dynamics of what you see in either industry news headlines or the proverbial or actual gossip and whispers about my buddy got so-and-so deal, look at that multiple, look at that valuation, that I find, at least from my experience, a lot of the time I hear these number...these scenarios where people got really big numbers, if you actually get to drill into the deal terms, what you find out is a very material portion of it is an earn-out and the earn-out is tied to a really significant growth assumption. So, it's like, wow, they got whatever it is, they got 12 times their earnings as a mid-size firm. That's a really big number. And then they get in there and, it’s like, well, yeah, because it had an earn-out that had 20% annual growth thresholds.
Jessica: Right. Excluding market, right?
Michael: Which, yeah, excluding market, which means, no, the reality is they got that multiple because they sold a business that's 40% bigger than it currently is, and they have 2 years to actually make it 40% bigger than it currently is. And if they don't, that number's not actually happening. That's not what they got for sort of the proverbial value of the business today. That's a prepayment of the next 40% growth that they only keep if they actually get the 40% growth. And if you make them 40% bigger, now that multiple doesn't look so large because it's really just a value of what it would be worth 40% larger 2 years from now that they prepaid today.
Jessica: Yeah. Well, okay, so first of all, thank you for bringing this up because I feel like I am constantly screaming this from the rooftops. Right? A multiple without explanation is meaningless. Right? Exactly what you said. You can hop onto the golf course and tell your friend that you sold your business for 12 times but unless you also tell them, yeah, it's 12 times but it was 8 times upfront and then exactly what you said, well, I have to grow it 20% a year for 3 years excluding market to get to 12 times at the end of 3 years. But it's 12 times. Right? But it's not, it's not. Right? Maybe it's more like 9 or 10 times because in all likelihood you're going to grow at 10% a year like you have for the last 20 years. Right? But that doesn't sound as good and that doesn't make headlines the same way.
So, yeah, but I think something you said that I think I just want to clarify, something that you might have been alluding to or maybe I misunderstood what you were saying, what we don't see in this industry very often are clawback provisions. And maybe that's not what you were saying, but the whole notion of prepayment doesn't typically exist. So, typically it's kind of what I just outlined. You're paying a multiple upfront for the business with the opportunity to earn more later on. It's not like net present value paid all upfront.
Michael: Yeah, that's why you get these earn-out provisions.
Jessica: Exactly. Exactly.
Michael: I got 12 times my earnings, it's like, "Cool, how did that actually work?" Well, it's because I got 8 upfront and then I get another 2 times earnings in a year if I hit 20% and another 2 times earnings after that if I hit another 20% growth. So, it adds up to 12. No, basically you sold your business for 8 times earnings and then if you stick around and grow it by 20% in a year, they're giving a piece of the 20% growth. And if you don't actually get the growth, then you really just got 8. And that's a cool number but don't tell me that you got 12 when it's tied to all these contingencies that you have not accomplished yet, and even if you do, it's not really 12 times what you are today. It's going to end up being 8 or 9 times what you would be in 2 years after you did all the growth contingencies.
Jessica: Well, it depends. Right? It depends if the future multiples are being paid on closing EBITDA or EBITDA at the time of the payment. Right? But that's really kind of getting into the nitty-gritty, but I think the point that both of us are trying to make is you didn't get 12 times. You have the potential to earn up to 12 times.
Jessica: Right? And that is a huge distinction. You have guaranteed the sale of your business from what you've gotten upfront. And then there are kickers if you're able to achieve. I think part of an M&A advisor's job is exactly what we're doing right now, which is to educate the seller to understand what they can actually get, and then it's up to the seller. Some people have faith in the market and are like, "No, we have to include market in these future payments because I'm pretty positive, if you look at historical returns of the S&P over the course of three years, the market's going to be higher than it is today." And others are like, "There's an election coming up. There's a war in Russia. We can't include the market. Anything can happen. We have to take it out." And there is no right or wrong answer there. It's completely up to the individual, the same way that some people are more risk-averse in general and say, "I need as much guarantee as possible. So, if it means that the multiple has to be lower but it starts at 0% growth, I'll take it because I feel pretty good that I can stay flat for 2 years and achieve some small portion of the earn-out." But others are like, "I've been growing like gangbusters every year. Why would I start at 0? Get me a higher multiple and put that hurdle at 7% growth because I know I'm going to blow it out of the water."
There's no standard and buyers tend to be accommodating, to a point, right, because ultimately the hope is that the person that you end up or the firm that you end up selling your business to is someone who has a common belief in who you are and your ability to do what you say you're going to do, and is willing to understand your perspective. And as long as it makes financial sense in their models and all that, there are negotiations to be had around what an earn-out should look like, if there even is an earn-out. And that's the exciting part of my job. Right? It's just they're all completely different and it's interesting getting to know people and understanding their risk preferences and what's important to them and how much they believe in themselves and the future growth and their partner's ability to help them grow. It's great. It's a little bit of M&A advisory and a little bit of psychology. It's a lot of fun.
How To Compare Purchase Proposals To Find A Fair Deal [34:47]
Michael: So, in this theme around these prices or headline multiples that you hear, there can be a lot of fine print attached to that about what it really takes to get that, that may or may not really kind of mean the number is the number. I'd love if you can educate us what other kinds of terms get attached or negotiated out there that are the context to a price that you should be aware of when you hear people either throw numbers around on a price or you're getting an offer and trying to understand it. Right? To me, one of these is, okay, well, you can talk about the number but you're probably not really getting that number upfront. There may be retentions or earn-outs. They could have growth hurdles, which means there might be a lot more to do to really get that number. So, what other kinds of terms, conditions, fine print stuff shows up that maybe advisors don't realize in reflecting why price alone is not the great indicator of who got a better deal?
Jessica: Okay, I have 2 answers to that question.
Jessica: I think the 1st, which is on the economic side, is you don't know what the baseline EBITDA is. So, when I'm helping a firm through a sale process, assuming that we're not just doing a one-off negotiation, right, we've actually gone to market and maybe we've received 7 or 10 proposals, is taking a look at all of the proposals and looking at them on an apples-to-apples basis. So, if your EBITDA that we put as your pro forma run rate is a million dollars, right, we have gone through your P&L and we've said, "Oh, okay, Mr. Smith, you've only been paying yourself $50,000 a year. No one is going to pay you $50,000 a year because you're the CEO of a company. So, we have to normalize your income to market levels so maybe you have to be $250,000 because that's your replacement cost. Oh, you've been running your personal automobile through the business. Let's remove that because that's not going to happen once you do a deal. Right?" So, we're normalizing your income statement and we're giving that to all the buyers.
It's up to the buyers when they submit proposals to look at that income statement and say, "Oh, $250,000 actually doesn't work at our firm. You have to be paid $400,000." Or "Oh, all of our partner firms receive an allocation for the technology and marketing that we do. We're going to ding you by 200 grand or whatever." My point is they're all going to come up with their own EBITDA number on which they're going to put the multiple. So, you may have a firm who puts a 10 times multiple on your business and leaves your EBITDA as is. And then another firm who puts a 12 times multiple on your firm but knocks you down $300,000 in EBITDA. Right? So not every multiple, even just off the jump in your own process is created equal because they could end up...a higher multiple could end up yielding a lower deal value if you're starting off with a lower point. So, even when you're receiving proposals, it's not just not, "What are they going to pay me?" It's like, "What are they going to pay me on?"
Michael: Okay. So, at least for better or worse if I get it down to a pricey price, these folks are offering me $7 million, these folks are offering me $8 million, I can at least start to compare 7 versus 8. But if I'm just going to look and say, "These folks are offering me 10 times EBITDA and these folks are offering me 12 times EBITDA," it's like, well, how did you calculate EBITDA?
Jessica: Are they, though? Exactly. Exactly.
Michael: Define EBITDA in the version of your quote.
Jessica: Exactly, exactly. So, that's not even comparing yourself to what's in the market. That's just comparing one proposal to another. But then in terms of did you get a good deal, right, price is just one of the many, many, many factors that goes into whether or not a deal is good for you. You know? And the reality is the price will be fine. You're not going to sell to a firm who doesn't understand market. Or maybe you will but you've come to terms with the fact that you're leaving a bunch of money on the table because they feel like they're the right fit otherwise. But assuming we're in a relative standard deviation from the other market terms that you've received, right, it's like, okay, well, then let's look at your employment agreements. I was saying this earlier, right, do they want you to sign a five-year non-compete? If you're taking equity as part of the deal, are they going to let you have a liquidity event whenever you want or is it locked up for 10 years or unless you die? Or do your non-competes start over again if there is a liquidity event and now you're locked back in for another three years? There are so... Purchase agreements tend to be 60 to 70 pages long and the economic part is 1 section.
So, once you get into those negotiations, a lot of it comes down to having a good M&A attorney, too, to look through the reps and warranties and the indemnifications and all that and make sure that you're not indemnifying yourself to anything that you shouldn't be. And if something really, really bad were to happen, are you on the hook for more than what you received for the value of your business?
Michael: So, for advisors who have never been through this even, quick primer, what is reps and warranties and indemnification sections? What are those covering?
Jessica: Good questions. So, reps and warranties, representations and warranties, it's really representing that you're selling the business the way that you have represented it. And they go hand-in-hand with indemnifications because it's basically saying if a year from now, we found out that you've been insider trading this whole time, we're not on the hook for that. You have to deal with the SEC and whatever fines come your way are your problem, right, because you've represented to us that you have not been insider trading. Or if we find out that you haven't been paying your taxes, right, and the IRS comes after us because you haven't paid your taxes in 3 years, we're not responsible for paying taxes that you never paid. That's your problem.
Michael: Okay. So, a lot of this falls in the domain of if there was stuff going on before we bought that could create liability for the business after we buy it, that ain't our liability after we buy it. You've got a hold onto whatever exposures you created before you sold it to us.
Jessica: Exactly, exactly. To be clear, it's not like, well, if the S&P goes down, you owe us money, kind of thing. This is like if you've been doing something that is fundamentally different than what you provided to us during due diligence, that is your fault and you're liable.
Jessica: But I think when you're thinking about just a good partnership, right, what should the average advisor be looking at when they receive a proposal, it's, one, are the economic terms fair? Is my ability to earn whatever comes in the future not crazy? Do I actually think I stand a shot at earning that? What do the employment terms look like for me and my employees? Are people who aren't receiving money, proceeds from a transaction, are they also tied to your non-competes?
What we see a lot is you have a founder who owns 95% of the business and then you have 2 other people who each own 2.5%. So, they're receiving proceeds but they're not receiving life-changing proceeds. Right? But they're still tied to the same restrictive covenants as the founder who's receiving 95% of the proceeds. Then it's kind of like, "Well, what are we doing here?" If these people are receiving a few hundred thousand dollars, obviously that's great, but you can't force them to sit out for 2 years after they leave the firm because they don't have the money sitting in their bank account to allow them to do that. Right?
Michael: Except, I hate to say it, except can you? Because as you noted, if the founder owns 95%, they can sign this, right? Are proverbial junior advisors, junior partners...how at risk are they for getting dragged along in deals like this or are there steps they can take to protect themselves on that?
Jessica: Hopefully not, right? If you're at a point in your career where you own equity in the firm that you're working at, you would hope, and I have yet to be proven wrong here, that the person who owns the lion's share is a pretty good person, isn't going to sign a deal if it means that they're going to put the person that they provided with 5% or 2.5% of the equity in financial ruin in a case where they decide to leave or if they get fired. And no good M&A advisor and no good M&A attorney would allow something like that to happen.
Michael: Okay. So, what else are the... I almost view this as the terms that inexperienced advisors don't realize they can or should be negotiating. I'm hearing some of the financial contingencies. "Oh, you want that multiple, but what has to go with it?" That becomes a negotiating point. Employment agreements and non-competes and term durations such after the deal closes is a lever. Reps and warranties may be a scenario but probably one your attorney has to help you navigate.
Jessica: Yeah, later on. Right?
Michael: Yeah, you're not negotiating that stuff upfront. What else crops up as the levers that get negotiated?
Jessica: Compensation, not just for the founder, seller, but for everyone, making sure that no one is getting paid less. Making sure that bonuses are guaranteed for a year or 2. Really just kind of making sure that everyone's lives are not impacted for the negative once the deal is done. And then I think it's simplifying it, but I would say kind of like everything else. Right? Every advisor had different sticking points and things that are important to them, and this may or may not appear in an LOI but it's equally important even if it's not necessarily in writing. Right? It's understanding if we're going to integrate, what does integration look like? What's the expectation on me? Some people care deeply about their investment process, right, and want to make sure that before they sign an LOI and start working in earnest to get a deal done, no one's going to come in over the top and be like, "All right, well, you have 6 months after we close to sell all your holdings and enter into our buy/sell list, right, or into our 5 models or whatever." Some people are like, "I'm not in this for investments. I'm in this for managing relationships. As long as you tell me that I'm not going to have huge tax consequences for my clients, I kind of trust you guys to take it from here."
Some people really care about growth and marketing. So, understanding the engines behind that and whether a partner can actually help them grow. Some people don't want help growing. Some people are like, "Oh, well, we've never been in a referral network before. We don't want to start fielding 3 referrals a week because you're number one on Fidelity and now I have to spend a lot of my time every week vetting new clients." I can kind of go on and on and on because every advisor is different and their wants and needs are different. But I think it really comes down to having enough conversations with a potential partner to feel comfortable that they're going to take care of you.
Oh, I guess another one is fees, making sure that the partner is not going to force you to raise your client fees as soon as a deal is done. Some people are like, "Well, you know what? I have a handful of legacy clients who I've been charging 40 basis points for, and I've been looking for an excuse to increase my fees so, great, when I have them sign new investment management contracts, I'll increase their fees to 65 basis points. This is great." It all depends. Whatever it is that's important to you, this is not the time to be shy. This is the time to really, really dig in and make sure that they're answering your questions and if you ask it and they don't answer it the right way, ask it again, ask someone else. Ask 2 more people. Talk to someone who sold their business to the company a year ago and then talk to someone who sold their business to the company 3 years ago and get their experience. Did they live up to everything that they promised me? Have you found that they're easy to work with? Have you found that they're forcing you to do things that they told you they wouldn't? Inform yourself. This is a really, really important decision.
When To Use An EBITDA Multiple Vs. A Revenue Multiple To Value A Firm [48:40]
Michael: So, you'd commented earlier that it tends to be less about price, per se, only because there's enough buying activity and competition out there that most buyers who are familiar with market are going to give you at least a reasonably market-ish price. That's great for, as you noted, the firms that are deal machines that are serial dealmakers, they know what the going rate is because they've been on a bunch of them in competitive situations against other who they're bidding on as well. Right. As the prospective seller, I've never done this before, I've never seen the numbers, I at best only see the random things I hear in the media or one-offs where this person got 8 times their earnings, this person got 12 times their earnings, this person got 21 times their earnings. This person got valued of X times their revenue. We hear numbers all over the place, I feel like, in practice and that there's not really a lot of clarity about what is "market" for the average advisor who doesn't live a steady stream of deals, they're only selling their own firm once and for the first time.
So, can you help anchor us a little bit of just what are realistic expectations? Should I be thinking in terms of revenue or EBITDA or does that depend on size? What kinds of multiples should I expect? And I know you can't pin down to an exact number, so what levers impact to help us get oriented on realistic valuation, I'll just call it neighborhoods. Again, no one's getting precisely valued off a podcast but help get us the right neighborhoods.
Jessica: That is true. So, I think as far as your question on do you place the multiple on revenue or do you place the multiple on EBITDA, I think that's a great place to start. Typically, wealth management firms are valued as a multiple of EBITDA. And the reason for that is because expenses can vary wildly from firm to firm. So, for easy math's sake, right, let's say you have 2 billion-dollar firms, right, and each of them are charging 70 basis points on average, right? So, that's $700,000 of revenue. If you put a multiple of revenue on both of those firms, they're going to end up with the same price. Right? But maybe one of those firms has 5 people and they're in the middle of nowhere in the middle of the country where their expenses are low and average salaries are lower and they're just kind of happy bobbing along and you've gotten $2 billion, everyone's happy. They have 60% margins. Right?
And then you have the other firm who is in New York City and they're on Madison Avenue and they're actually employing 15 people and they're using top-of-the-line technology and they have 15% margins. By putting a multiple of revenue on both of those firms, you are wildly overvaluing what you are going to get in returns from that second firm with 15% margins. Right? So, EBITDA is kind of like a great equalizer. If you put the same EBITDA multiple on these firms, you're going to get very different price points. So, that is why typically EBITDA multiples are what gets used overall to value firms.
There are obviously circumstances where that doesn't work. So, for example, if a firm is losing money, you can't put a multiple on a negative number, so you have to use a revenue multiple. Or if a firm is brand-new or is going through aggressive growth or something, right, where their EBITDA doesn't accurately reflect the future value of the business, you would want to use a revenue multiple there too.
The other time that revenue multiples are useful is if a firm is being bought and integrated, it becomes hard to figure out what the EBITDA number is later on because the buyer might be allocating costs to them or whatever else. So, when you're thinking about earn-outs, often you see those being revenue-based just because it's a much easier number to track, especially if you're excluding market. It's a lot easier to take a look at your revenues and be like, "Okay, here are our inflows, here are our outflows. The rest is market. Let's put the multiple on this portion of the revenue."
Michael: So, in this domain of earnings, I'm just thinking for all the advisory firms that are looking at P&Ls, particularly for the past few years and just the particularly wonky volatility of the past few years, my earnings kind of move non-trivially from year to year sometimes just because of market volatility alone because we're kind of operationally leveraged to the market. Does that mean as a owner and prospective seller someday, am I trying to time this to a good year or do people smooth these numbers? Can I adjust them? Do we take averages? How much do I need to be worried about, "Oh, well, this isn't going to be the good year to sell because our earnings number isn't great this year. I can't mark to a multiple this year because a multiple last year would've given me way, way more money?"
Jessica: Yeah, well, okay, so the analogy that I use, and I have to come up with a better analogy, but I have 4 little kids and it's top of mind for me. So, the analogy that I use is when you are deciding to have your 1st kid and you're like, "I want kids but I also want to go to Paris before I have kids." Or "Well, I want to have kids but I don't want to be pregnant in the winter, so we'll just wait 6 months." There's always a reason not to. There's always something to look forward to and be like, "Okay, as soon as this happens, then we will." It's not dissimilar to selling your business. You're like, "Well, the market's down right now but next quarter it's going to be better," or "Why don't I just wait 1 more quarter because I know that I have clients who said they were going to sign and fund by the end of the year, so let me just get those." The thing is, between now and the end of the year, you're probably going to get another new client who's going to sign and fund by the 1st quarter. These are really good problems to have because it means that you have a good business. Right? What buyers like to see are healthy businesses that continue growing. So, at a certain point, for better or worse, you just kind of have to draw a line in the sand and be like, "All right, let's do this." So, that's 1 answer.
The 2nd answer is if we go to market on January 1, proposals are probably going to be due right around the end of the 1st quarter. And then time will pass and we'll request final proposals maybe a month or 2 after that. In that time, maybe you had 2 or 3 new clients come in. We'll true all that up so that you're not just leaving money on the table. If you're like, "I brought in $50,000 of new assets," 10 times that is a lot of money. I don't want to just walk away because we drew a line in the sand on 3/31 and now it's 5/30. Right? So, all of that tends to get trued up if it's significant before a deal is done. The question you have to ask yourself, right, is I have to be reasonable about this because the market's up right now, and if before signing we hit another quarter end and the market's ever further up, would I be asking for less money if the market was down? So, it is kind of a reasonableness test to an extent. At a certain point, you just kind of have to say, "All right, let's do it. Let's see. My business is solid, my clients are happy, I'm bringing in new assets. I still have a little bit of a runway before I want to retire. My employees are happy and they're not going anywhere. It looks like the... It's been a seller's market for a few years so I can probably get a good price for my business. Let's just explore. Let's just see."
The other thing, right, just in terms of the nuts and bolts of is there a smoothing, right, what you're asking before, the income statement that we go to market with is what's called a run rate. So, we're trying to get as best of an understanding as we can of what your business looks like on a going concern. So, we're not taking the last 12 months. We're using your most recent quarter and annualizing it to get a really solid understanding of what your business looks like today. Right? So, if the market was down 2 quarters ago, it's not going to affect your valuation currently. And that gets given to buyers in conjunction with your assets under management flows for the past several years. So, what we like to do is break that out between your new client assets, your lost client assets, and then inflows and outflows from existing clients and then market. Because buyers like to know that you've been growing nicely independent of the market. So, if it has been a bull market for the last several years, and that's the only way you've grown, it's a very different story than if it's been a bull market but you've also been bringing in a whole bunch of new assets independent of the market.
So, it's a whole story that goes into what a multiple should be or what the value of your business is. It's not just let's look at the last year and figure out a price.
Michael: So, with that domain, can you then help us, I don't know, get to a little bit more of a neighborhood of just, so what kind of multiples should I realistically expect or not realistically expect when we start talking about EBITDA and/or revenue?
Jessica: That's such a hard question to answer. What I tell every prospective client is I like to under promise but it depends. It depends on the size of the firm. It depends on their margins. It depends on their growth. I'll say your average manager is not getting 15 times for their business. They're also not getting 6 times for their business. I'm talking about EBITDA, EBITDA multiples. But, it depends...
Michael: Well, give us some of those parameters then, right? So, the classic advisory firm that I see going through... There's a couple of sides, right? There's my highly successful solo. Right? I've got probably anywhere from 30 to 50 million at the low-end up to even 100 million at the high-end. It's me and a couple of staff around me. Then there's the next profile that I'm probably $200 or $300 million, I've got a few advisors and a team that we built up to over a long time. Then there's the proverbial mid-size firm. I'm a half a billion to a billion and growing but hitting some of the challenge points. So, how does it vary across... If size and some of those dynamics are drivers, how does it peg out as I go through those different growth stages or size stages?
Jessica: I would say there's scarcity value. Right? So, if you are a 2, 3, 4-billion-dollar firm that is actively for sale, you're probably one of very few firms of that size that's up for sale and people understand the scarcity value associated with that and are willing to put a higher multiple on a business like that. It's going to have a transformational effect on their business, typically.
Michael: So, if I'm the multibillion-dollar firm, low teens, I could be talking about numbers like 13 to 15 times EBITDA because there's just only so many big firms, big buyers want to deploy dollars. There just literally aren't a lot of places to deploy dollars in big chunks. So, I get a bit of a premium. So, I'm presuming now if I get down to my next tier down, or I'm at half a billion to a billion, growing in that range, I'm not getting teens anymore, if that's what I get with a scarcity premium. So, now am I in a 9 to 12 kind of range? Is that where I start landing at this size?
Jessica: No 2 firms of the same size are created equal. So, you could have a firm with 300 million under management who's making more money than a firm with 600 million. Right? And they're going to command a higher multiple than a firm that's they're the same size but overweight on their expenses, or who hasn't grown nicely, or who has someone at the helm who's 75 years old and is trying to get out in the next year. There's so many factors that go into play and that's kind of why I was talking about scarcity value. It's not the only driver of where the multiple ranges are, but it's a big one.
Understanding The Different Types Of Buyers And Which To Engage With [1:02:51]
Michael: So, now take us back to just the buyer types. We had talked about PE. We talked about aggregators and integrators. Are there other groupings or boxes that we can kind of mentally sort prospective buyers into as we're trying to understand the landscape?
Jessica: Well, I think drilling into some of those categories might be helpful just in terms of kind of like the size and scope of who some of those aggregators and integrators might be. You have firms that are, like we were talking about, that have private equity backing, right, who are maybe smaller. Right? Maybe they have 10 or 15 billion under management. They're not the behemoths, right, but they have capital behind them. So, they're able to fund acquisitions the way that they wouldn't if they were independent. And you can contrast those against some of the serial acquirers that have come out of the woodwork in the last 2 or 3 years who are maybe at 50 or 60 billion. And then you can contrast those against the ones that you hear about in the headlines once a week, right, the big, big guys, right, Focus, Hightower, Creative Planning, Wealth Enhancement Group, the firms that are announcing deals every week. Right?
And then I guess on the bottom side of that scale you also have firms that are doing opportunistic acquisitions. Maybe you have 400 million under management and you are really good friends with the firm down the street that has a billion under management and they're like, "Well, we're not acquisitive, but if you're looking to retire and we know that our businesses operate similarly, let's have a conversation." Right? And I guess the other one that we haven't talked about yet are kind of the other financial institutions. Right? The insurance firms or some of the wirehouses that will acquire wealth management firms, or banks, right, who are looking to build out a wealth management presence, or CPA firms who want to just have kind of like a referral network with a wealth management firm.
Michael: And are there significant differences in terms or structure or pricing across these? Or is it more just a function of the kind of deal profile you want in the first place? So, if I really wanted to out entirely, I may be looking at an aggregator. If I really want to stick around and I want more money to grow, then kind of by definition I'm typically looking at a PE firm. Are there differences in price and terms or does it more tend to be a if I'm looking for certain deal types for me as the seller, it tends to group me into certain categories?
Jessica: I think where you're going to see the biggest price difference is between firms that have capital backing and firms that don't. So, in the example that I gave of the billion-dollar firm next door who doesn't have any sort of capital backing, they're funding an acquisition off of their balance sheet. Or maybe they're taking out debt and because of that, if you were to go to the open market with your firm, you will likely end up with a better economic deal than if you are talking to a firm that has deployable capital. But that's not better or worse, right, it's just a different type of deal. Or maybe you're getting paid out over a much longer time horizon because they don't have the money to pay you over the course of 2 years. Maybe they can finance it over 7 years. So, I think the economics are different. I think that's the biggest difference, I think, between buyer types. But, yeah, when you're contrasting the $15 billion firm versus the 60 versus the 100, right, that really comes down to the type of environment that you want to sell your firm to. Do you want to be kind of a bigger fish in a smaller pond, or do you want to feel completely taken care of?
I have sellers who are like, "Oh my god, the idea of selling to a firm that has 10 billion under management is amazing to me because my billion dollars or my half billion dollars or whatever, is going to make a meaningful impact on their overall business. They want me to join the board. They want me on the investment committee. I am going to have a direct effect on the value of the equity going forward." And other people are like, "This $80 billion firm can find my successor and they can take everything away from me and I don't have to worry about anything other than making sure my clients are happy. The idea of going somewhere where they want me to still be actively involved in the business and decision-making and future acquisitions sounds terrible to me. I don't want to do that." Right? It just really... And there's so many flavors and variations of that and it's so, so seller dependent.
And what's funny is, I see this all the time, what people think that they want before they start going out and talking to firms, often ends up being different once they've actually spoken to them. And that's why when I'm putting together a prospect list for a seller, if it has 10 firms on it, 12 firms on it, I try really hard to think what is a really good mix that I can put in front of this seller so that they can get a really, really good understanding of the buyer landscape because maybe they're like, "Well, the last thing I want to do is to sell to this huge firm where my $400 million isn't going to make a difference." Then they meet with the firm and they're like, "Oh, this is great. Can we talk to 1 more firm like this?" I'm like, "Absolutely, let's bring another one in." Because often you just don't know until it's really in front of you.
Michael: What strikes me, though, that there's a couple of different profiles of sellers that they feel like you end out with this. There's just the, "I'm done, I'm out," right? "Someone just take the whole thing. I'm ready to be done. I would like my check. It's time to retire." I feel like that's the classic, "I'm selling my firm and riding off into the sunset." But then there's the, "I'd like to partially sell and take some chips off the table, but I'm not really done yet. I would just like to rebalance my personal balance sheet. I'd like to de-risk a little, but I want to stay." There's the version that's like, "I'd like to sell because I don't want to do the business-y stuff anymore and I wouldn't mind getting a check for that, but I'm actually happy to continue being an advisor. If I can tuck into you and you deal with all the other business-y stuff, I can just go back to client things and I get a check for what I built, that's great. I can be an advisor for a long time to come without the rest."
Michael: So, how has this landscape changed over the past year or so just with this spike in interest rates? I know there was a lot of industry prediction of there's so much buying activity, it's all boosted by ultra-low interest rates for years. I remember people saying for a long time all the buying activity was going to evaporate when interest rates inevitably rise, I guess we were saying for basically 10 years after the financial crisis. We've finally gotten to the moment, interest rates have risen dramatically. So, I guess just as someone that does this on an ongoing basis and sees the ongoing flow, how are you actually seeing the landscape shift in a higher interest rate environment?
Jessica: So, it's interesting. Right? Anyone who's kind of been reading Citywire has seen some of the larger brand-name firms have done capital raises over the last 12 months because a lot of their earn-out payments are due, and they might not necessarily have the capital with which to pay them. So, I think that has happened on a much larger scale. But on a smaller scale, I haven't really seen much of a change, to be honest. Multiples have not changed. I think what has changed a little bit is a broader understanding, like we were talking about earlier, of what the multiples that we were seeing in industry rags or in just gossip mean. And I think buyers who stuck to their guns while talk of all these crazy multiples is flying around have continued to be able to do deals that, when they look at their models, make sense and have kind of weathered the rising interest rates. And they're still out there and they're still offering very decent multiples and are still competitive within a competitive landscape. It's just some of the noise has been cancelled out.
Why Jessica Doesn’t Charge A Success Fee For M&A Deals [1:15:02]
Michael: Right. So now, help us understand your business. You've shared a lot of your expertise around this for the better part of an hour with us now. But just get us to speed. What do you actually do? What do you do?
Jessica: I guess that would be helpful. So, I spent my entire career providing M&A advice to the wealth and asset management industry at a specialist investment bank. And I say, for better or worse, all I know is investment banking. I set up Turkey Hill about 2 and a half years ago with the understanding that providing M&A advice is the only thing that I have ever done professionally. The question is how can I improve upon a model, and from my perspective, right, that has kind of existed in the same form for many, many, many decades? And when I set Turkey Hill up on my own, I kind of left asset management behind because, to me, asset management is a product-based business. I'm oversimplifying it but it's not overly different from manufacturing sneakers or selling shipping containers or whatever. You have product. If the product performs well, then you make money. And if it performs poorly, you lose money. But it really is product-driven. You're talking about track records and the people who create those.
Wealth management, by contrast, is the opposite. Right? Typically, there is no product. It's just people who really, really care about other people and get those other people to trust them with their life savings and their livelihoods and the future of their children and their grandchildren. It's just relationships. Right? And when it comes time to sell your life's work of developing all of these relationships, you need to turn to a trusted advisor the same way that your clients look at you as a trusted advisor. The way that a typical investment bank's fees are structured is there is a retainer that gets paid while the deal is being done and then at the end of a deal, there is a success fee that gets paid to the bank. And that success fee is 1%, 2%, 3%, 4% of the overall deal value and typically there is a minimum. Sometimes the retainer fees will be credited against the success fee, but it'll still be subject to that minimum.
And in my mind, there seems to be a little bit of a conflict of interest between the M&A advisor and the seller in that the M&A advisor is incentivized to get the highest price and to make sure that the deal gets done. So, what I have done is I have removed the success fee component and all I do is charge a monthly retainer regardless of whether you're a buyer or a seller. And by doing that, we are in full alignment. So, if a seller decides that they want to go with the 3rd highest bidder instead of the first because it feels like a better cultural fit, great, do that. If we're negotiating a purchase agreement and you're like, "These people are just not the people who I thought they were. I don't want to do this deal. I want to walk away," okay, walk away. And by the way, if we're having that conversation and I hear you but what they're asking for is market and you're being unreasonable, I'm telling you that because what they're asking for is market and you're being unreasonable, not because I want to get the deal done. It's true unbiased advice.
And the same thing goes for buyers. Right? If I'm telling you we need to increase our bid by half a turn, it's because we need to increase our bid by half a turn, not because it's going to affect how much I get paid.
Michael: Right. Well, it strikes me in that frame, right, just when you get around the dynamics of success fees, really what are functionally commissions at the end of the day. If I know exactly what I want and I need someone to help me facilitate the process, you don't necessarily mind paying a commission. Look, someone's got to execute my thing. I'm going to the darn finish line and getting the thing. If you can facilitate me and help me get a good deal, okay, I get it at that level. But as you noted, sometimes the best answer is that the deal really shouldn't work out because it's not really a culture fit. It's not in alignment. And now all of the sudden you've created an environment where your investment banker really wants to get paid so they've got a very hefty incentive to get the deal across the line, as well as just when you create a world where they're getting paid on a percentage of deal value, "Oh, you can get paid a little bit more as long as you sign a longer non-compete? Well, that doesn't affect us. So, take the higher deal. We'll get a better success fee."
Not to paint everyone doing bad or nefarious stuff at all. But just as you highlighted, there is a conflict of interest that gets there in a world where I don't think anybody who's selling wants to take a wildly lower price or anything, but you don't always pick the top bid because sometimes it has contingencies or strings attached that are not as compelling, and it can get a little challenging when the person who's "advising" you on the deal gets paid more if you take the top bid and not the other ones.
Jessica: Yeah, look, the comparison that I use is, 3rd analogy of this conversation, is acting as a fiduciary. Right? Many, many times wealth managers will not sell proprietary product or they will not sell insurance. Right? Because they're like, "I want to make sure that my client...
Michael: I got out of that environment to go independent. Yes.
Jessica: Exactly. I want to make sure that if I'm telling a client they should be investing in this mutual fund or getting this insurance policy, it's because they understand that I think this is truly the best for them, not because I'm going to get a cut of whatever. Look, the advisors who do sell insurance or do have proprietary product are like, "Yeah, but I would never do that. I would never do something nefarious or put someone in a product that's not right for them just so I can make a little bit of money." Right? And the same is true with every investment bank. There are very few, very, very few, if any, bankers out there who are like, "No, I'm going to do a disservice to my client so that I can make more money." But how do you convince a client of that? I will tell you, now that I'm doing it this way, I do not ever get asked, "Are you doing this in my best interest?"
And fully transparent under the hood, it ends up working out. Not exactly the same for me, especially when you get into kind of the larger deals, but I don't have a team of 10. I don't have VPs that I have to bonus out. I don't have an address in midtown Manhattan. I have very little overhead, so I'm not taking a percentage of the success fee as what I'm relying on for my income. I'm taking the full retainer. So, from a financial perspective on my end, it ends up working out just fine. And then on the client's end, they're saving hundreds of thousands, if not millions of dollars receiving the same level of advice and being fully sure that we are in alignment and working towards the same goal.
Michael: So, help me understand what a typical retainer fee is in practice. What does that look like in an engagement with the firm?
Jessica: I try to price myself kind of in line with other investment banks and what a monthly retainer would look like. Obviously, there are different structures kind of across the board. But where I landed is typically around $15,000 a month and that goes from the day we say go up until either signing or closing, it depends on the client. Some like to have me stick around. Some kind of feel like once we get to signing, we're done. I guess for easy math, call a deal 10 months from when we start to closing, that's $150,000 compared to a minimum that probably starts at $300,000 or $400,000 and just goes up from there at a traditional investment bank.
Michael: Right. If I'm some half-billion-dollar firm, I probably have 3 or 4 million of revenue. If I'm just paying a 3% or 4% success fee, I'm quickly at close to $300,000.
Jessica: Yeah, and typically minimums tend to be a little bit higher than that.
Michael: Because overhead. Pesky large firm overhead. So, then I have to ask, okay, then how are you actually able to do the same service for so much less? Where's the slippage? Why is the price not so big?
Jessica: Yeah, again, there's just no overhead. I have the benefit of kind of being a small business and not having to pay a staff of 5 people under the age of 26. I'm willing to do the less glamorous parts of a job. I don't mind putting together a CIM. I'm happy to do the research to come up with a really good prospect list. I'm limited by my capacity. I can't represent 15 firms at the same time because that would ruin my reputation if I'm able to do a really, really good job for all of the firms.
Michael: How many do you work with at any particular time? I'm assuming then you have a, "I can only take up to X firms at a time."
Jessica: Yeah, it's less about that and more about how many I take on at the same time because deals ebb and flow in the amount of attention that they require. So, the last thing I want to do is take on 3 sell-side clients at the same time because that means that I'm negotiating 3 purchase agreements at the same time or I'm flying out for final round meetings with, I don't know, 12 firms at the same time, and that just doesn't work. Right? But if I can take on a client a month or a client every month and a half, that works just fine.
Michael: Okay. And then they end up on kind of a staggered pace because some might get through fast in 6 months, some might want you all the way to closing. That stretches out to 10 to 12 months. Some will consult with you and after 3 months say, "This was really valuable, and we've realized that we don't want to sell our firm. Nevermind."
Jessica: That's yet to happen but who knows? Yeah, and like I said at the top of this episode, for better or worse, all I know is investment banking. So, the beautiful part of my job is that I get to have dinner with my kids every night. They're little. I get to put them to bed. I get to drive them to school most days and it's great. And I have the flexibility to then at 8:30 at night sit back down at my desk and say, "All right, West Coast client, it's only 5:30 there. Do you have an hour to talk?" Right? So, it ends up working out.
The Surprises And Low Points That Jessica Experienced On Her Journey [1:27:10]
Michael: So, you lived in larger investment bank environment before coming out on your own into this world. So, what surprised you the most about the path to building your own consulting business around this?
Jessica: Well, let me answer that differently. My fear was that I was just going to really embarrass myself. You never know what's going to happen. I assume the majority of your audience is entrepreneurs, right? Putting yourself out there and just hoping that people believe you is terrifying, especially in an industry full of really intelligent people. So, I think the biggest surprise has been the amount of people who kind of understand and agree with my philosophy and I'm happy that people kind of look at my pedigree and agree that I probably know what I'm doing and I continue to be humbled, truly, this is not lip service, with the clients that I get to represent both on the buy side and the sell side. Every new client is just amazing to me and I think and I hope that carries through in the level of service that they receive and the negotiations that we go through. I feel like a new best friend every time you do a deal, which is just great. I'm so surprised and I guess not to sell myself short, but imposter syndrome is a real thing. Right? It's just great. It really has been amazing to see how welcoming the community has been both among other investment banks and the wealth management community.
Michael: So many of us in the independent world, often we end out there because we don't like some of the conflicts of interest in the world where there's this pressure that you really, at the end of the day, don't fully get paid for your value unless you get the signature, you get the deal closed and just at some point, that creates some awkwardness and some challenge. So it doesn't entirely surprise me, yeah, to take a less conflicted investment banking model to an advisor channel that has a heavy roots in finding less conflicted paths would find some very good positive alignment.
Jessica: Yeah, right? When you say it that way, right, I think the other nice thing has just been I got to cut my teeth for a long time, really understanding the industry, understanding what is market and who the buyers are and whatever. And now that I'm on my own, I get to kind of do it my way, right, which is nicely. Right? And I've found that negotiations tend to be a lot easier when buyer and seller feel like they're working toward a common goal, rather than going into a negotiation and saying, "This is what I want and anything that you're saying is no, no, no, no." Right? Which I think is what you think of when you think of an investment banker. Right? But speaking with the other side and saying, "Okay, well, let's think about how I can go back to my client with something that they're not going to be upset about. Let's come up with a solution. Let's be reasonable about this. Let's create a partnership instead of an adversarial relationship off the start often yields better results."
Michael: How about that?
Jessica: Believe it or not, right? And having the flexibility and the ability to do that and kind of eschew the traditional negotiating tactics and world has also been, I think, not only great for me because my hypotheses continue to be proven correct. But I think it's also if I had to guess, not to pat myself on the back here, a little bit of a breath of fresh air amongst the buyers who are used to dealing with the typical M&A advisor.
Michael: So, what was the low point on this journey for you?
Jessica: The low point? Oh, gosh, that's a good question. It's been 2 and a half years, so I think it's really kind of what we just talked about. Putting myself out there, I was very nervous, and continue to be nervous, honestly. Who knows, like I said, if I'm not in the room? There's a lot of room for traditional bankers to say, "Okay, but here are all of the reasons why working with Turkey Hill is not going to be as good as working with us. Sure, you're paying less but is a discount always better?" I'm up against much larger institutions with longer histories and I think 1 of my best assets is my personality and just kind of getting to know me as a person and I can only do that 1 person at a time through 1 meeting at a time. So, just really kind of getting myself out there, having people understand that you're not taking a discount in value by reconfiguring the way that you pay your advisor. Right? And kind of shifting the mentality from, well, you don't pay your M&A attorney as a success fee. It doesn't mean that they're bad at their job. It just means that you're paying them differently.
So, I think just kind of having the guts, right, to kind of get out there. I'm very active on LinkedIn, or I try to be, to just get myself out there being on podcasts and going to conferences and becoming more of a public figure. It's hard and it's embarrassing. I say this all the time when I make these videos on LinkedIn, if anyone's seen them, my greatest fear is that my nanny is going to come up into my office and look at me, talking into my iPhone with a ring light and being like, "This is what you're paying me for?" It's humbling and it continues to be humbling. But it's a means to an end and I try hard to look at everything that I've done so far not as a low point but a learning experience. And I heard this advice recently where it's like, "It's better to put yourself out there before you become huge, right, because less people are going to see your mistakes."
Michael: Yeah, I like that framing. It's better to put yourself out there before you become huge.
The Advice Jessica Would Give Advisors Considering Engaging In M&A Transactions [1:34:21]
Michael: So, what advice would you give advisors that are maybe queuing up thinking about a transaction in the next few years?
Jessica: I would say...I guess a few things. The advice that I give to anyone contemplating a deal...I get asked a lot, "What should I do about my financials? I'm about to hire a new advisor but they don't have a book of business. Should I do it?" Or "I'm thinking about switching my CRM but it's going to be expensive. Should I do it or should I just wait since it's going to be integrated anyway?" And my answer is, "You're running your business. Please continue to run your business. You don't know if you're going to end up doing a deal. You don't know. Anything can happen. Do not make it detrimental to your business because you think a sale might be in your future." And that continues through a sale process. So, I think that's number 1.
Number 2 is if you're thinking about, and I guess it's kind of another way of saying exactly what I just said, changing your fee structure, having your clients sign new IMAs. Make sure that you're doing it because it's right for your business, not because you are trying to extract top value knowing that you're going to be for sale a year from now. Just continue to work in your client's best interest. Continue to build your business for yourself because that is what is going to sell your business, not any sort of financial finagling that might happen, because people see through that.
What Success Means To Jessica [1:35:57]
Michael: So, as we wrap up, this is a podcast about success and just one of the themes that comes up is the word success means different things to different people. So, you built a successful career in the traditional banking realm. Now you're off on a successful path with an independent consulting business, so the business side is going well. How do you define success for yourself at this point?
Jessica: Okay, well, I guess I have 2 answers for that, and the 1st is a little bit more touchy-feely. As I mentioned, I have 4 kids and 3 of them are little girls and I'm not doing this kind of independent of them. The wealth management industry is male-dominated. The investment banking industry is aggressively male-dominated. And most people are employees, not business owners. So, there's a part of me that's just like, man, I'm so fortunate to have built a business that as my girls grow up, my son too, everyone, I think it's important to have built something and to continue to build something that I'm really proud to show to my children and it's so cliché but it's true. Let them know, if you think you can do it, do it. The worst thing that happens is you fail and the best thing is you succeed. So far, I've been very fortunate that I continue to be referred clients, I continue to build this business. I'm, from a financial standpoint, making more money than I ever thought that I would doing this, and getting to share that with them. 1 of my girls named 1 of their dolls after a client of mine. I'm like, I don't know if this is good or bad but it's something that happened.
Michael: It's a little harder to scale.
Jessica: Yeah, right? I keep hearing the name, I'm like, "Oh my god. All right." And then from a business standpoint, I think success is a moving target. I think the last thing you want to do is become complacent. What I thought was success 6 months ago is now status quo and I continue to set hurdles for myself. Not big ones but it's like a to-do list, right? Sometimes you write out things that you already did that morning just to be able to cross it off. Sometimes you write things out that you know you're going to do later today so you can cross it out. And then some of them sit there for 2 days and when you cross it off, you're like, "Oh my god, I'm so happy I finally did it. Why did it take this long?" So, for me, it's hard to define success because there can always be more to do.
I think what would be amazing is if I saw more people doing what I was doing, if there was another person who decided to leave an investment bank and set up a retainer-based M&A consulting service, because that means that what I'm doing is resonating. And I have no pride of authorship. I think that people choose advisors in no small part because they feel like that person is trustworthy and intelligent and going to do a good job. And I think there's room for more of me and I would love to see more of this happening. That would be incredible.
Michael: Well, very cool. I hope we maybe inspire a few people listening to take a plunge and try it out.
Jessica: I hope so too.
Michael: Yeah. Well, thank you so much, Jessica, for joining us on the "Financial Advisor Success" podcast.
Jessica: Thank you so much for having me.