While the pace of advisory firm mergers and acquisitions has still not turned into the "financial advisor succession planning crisis" that some industry prognosticators once suggested, the pace of advisory firm founders selling their businesses is clearly on the rise, along with the growing number of articles about how owners can maximize their value and provide continuity for clients.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at advisory firm acquisitions from a different perspective: the employee advisor who remains behind, and may be worried about their compensation and even whether they have a future in the new acquirer's firm. Not to mention the inevitable change in culture that will come with a change in leadership.
The reality with most acquisitions, though, is that acquirers are very interested in seeing business cash flows remain stable... which means clients must be retained, and since financial advice is a relationship business, that means retaining the employee advisors as well. In fact, the closer you are to the client and the client relationship, the better your likely outcome in an acquisition scenario. And growth-minded employee advisors may even find that an acquirer provides them new opportunities for compensation upside, bonuses, and even equity potential, that were never an option in the past!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces.
What To Do When Your Advisory Firm Is Being Sold
What we're talking today about is: so what happens when you're working at an advisory firm, you've got a job in an advisory firm, and the news hits (or maybe just like the rumor mill starts going in the firm) that the partners are looking to sell. I'm basing this off a particular question I got in the past week. I thought it was really good.
This came from Jason. Jason said, "So I've just found out that our partners, our founders, are trying to sell the firm and I'm a little freaked out." I'm reading his message here. "I'm frustrated, I've actually been wanting to grow, the firm owners have kind of resisted it. It seems like they got a little comfortable with the profits of the firm. Now they've decided they just want to leave altogether. They're basically selling the value of clients that I brought in over time. It kind of feels like they're selling my client relationships. I don't really want to leave and set up shop myself, although I think a lot of my clients would come along." And so he says, "I'm not sure what to do. Do I need to go out on my own and leave it for our partners who are selling the firm? What should I do in this situation?"
I find this actually coming up more and more. It seems that it's really under-discussed.
So then reading the rest of Jason's message here... I think in a good-natured way he kind of called me out that we spend a lot of time in the advisory industry talking about advisory firm mergers and acquisitions and activity and how it impacts the owners of the firm who are trying to sell a maximized value. We talk about it in terms of the clients and continuity of clients and client service, but we talk about it very little in terms of the employee advisors who are still behind in the firm that just changed ownership.
So if you're an employee of one of these firms and you go through the transition... "What happens? What's coming down the pike? Is this good news? Is this bad news? Do you need to get ready to make a transition [yourself]? What should you be thinking about and dealing with?"
I wanted to tackle this topic head on. Our advisory firm has done a couple of acquisitions. I've lived through this from the other side and I talked to many, many of you over the years who've been through these transitions as well. So I want to share a little bit of thought and perspective.
First of all, I guess just number one at a high level response to Jason's angst outright, first and foremost, is: Don't Panic. Don't freak out. The fact that your firm is being acquired is not necessarily a bad thing. The reality for advisory firms in our environment is that we run good firms, we're profitable. Very rarely are you going to see an advisory firm sale where it's: "We're in crisis and we're bailing out." Like the owners are jumping out of a car that's going off the cliff and just try to bail for a salvage value before all the employees get screwed. That's not the environment of how advisory firms get sold. They're strong businesses with good recurring revenue that tend to be quite healthy and profitable. And buyers buy them because they're good businesses, and good businesses means happy clients who pay ongoing revenue with happy staff who are serving them.
The Advisory Business is a Relationship Business
So recognize this dynamic. Because what it actually really means from the acquirer's perspective, an acquirer who come in basically want two things. They want cash flows that remains stable, and ideally they want cash flows that grow over time.
From that perspective, because the reality is the advisory business is a relationship business, the things that any acquirer is most concerned about is: Are clients going to stick around? And because we're a relationship business, "Are clients going to stick around?" Which usually means, "Are staff going to stick around?" Those are the two things they're concerned about. Are the clients going to stay and are the staff going to stay? In general, you're going to find most acquirers want to minimize disruption.
Now, for very small firms, if you're the one and only employee in your firm, you may find things are a little more disruptive, because the acquirers are often going to want to just completely map what the firm did onto their existing infrastructure. In you're in a mid to large-sized firm, if there's multiple employees up to firms that have hundreds of millions or billions of dollars, the acquirer ultimately is going to want to integrate you in but they're very interested in stability, and client retention. Often staff retention as well, as ideally staff that are so happy in the new environment that they help to grow the firm. This does not tend to be an environment where someone comes in and starts cutting and slashing, particularly if you're one of the financial advisors. Advisors are generally not cut because acquirers know that clients need to stay, and clients are attached to advisors, and advisors, therefore, need to be retained as well.
So the dynamic and truth is acquirers really want to acquire advisory firms and see them stable, and see the clients stick around, and want them to grow.
And what that means is whether this is good news or bad news for you as an advisor depends a lot on your mentality about whether you're interested, whether you're excited about growth and trying to bring in more clients. That doesn't necessarily mean you're going to go out there and beat the streets, that could be driving referrals, building relationships, whatever your firm's business development process is.
How Do You Feel About Growing Your Advisory Firm?
So how do you feel about growth? If you are a growth-minded advisor, and frankly this was Jason's situation when he wrote the message. Jason said, "I've even been interested in bringing in clients but the firm owners won't really support me. They won't give me any decent comp for it. I get paid the same salary whether I bring in people or not, so why do I bring them in?"
And I know many of you are in a similar situation. Recognize that for an acquirer, our dream as an acquirer is to come into a firm and find a whole bunch of employees who say, "Thank goodness you're here. We've been dying to grow this business but the owners wouldn't let us do it. Will you help us? Will you support us in growth?" It's an acquirer's dream. You come as the employee and they say that to them, things are looking good for you as the advisor that's around! You're likely going to find more resources, you're probably going to find a change to your compensation that actually incentivizes you for growth, that will give you bonuses for business development or incentives to let you grow your income based on your client revenue.
Different firms do it different ways. Some firms may even put equity potential, put ownership on the table as the acquirer to a key advisor that's going to stick around and help to grow the subsequent entity. So if you are growth-minded advisor, this is a nice opportunity for you. If you've been wanting to create some new initiative in the firm, this will be your chance to be intrapreneur. Not an entrepreneur, but an intrapreneur. Building a new initiative or opportunity inside of your business, inside of the advisory firm, with the new firm that's going to be more interested in ideas for growth, because they're going to be interested in growth, because they want to see the cash flows grow.
Now, if you're not a growth-minded advisor, if you've been comfortable, you enjoy coming in, serving your clients, getting paid, going home, and doing your other stuff... an acquisition is not necessarily bad news, but recognize a couple of dynamics that are going to happen. The first one is you're likely going to feel like there's a little bit more pressure on you to grow. Again, just the nature of most acquirers, they're interested in not just retaining clients but growing clients. So you may see some comp structure changes, you may see a little bit more pressure come down on you to try to actually grow the firm a little more. Some acquirers are very gentle about this, some kind of come at you with the hammer and push you harder. So recognize if you're really not growth-minded, there's likely going to be a little more friction.
But still, the firm doesn't really want to see you leave. If you are a direct relationship manager of clients and you were closely connected with clients, no acquirer wants to see you actually leave. Ideally they want to see you stay and grow, second best is they want to see you stay and retain. Distant, distant third is having you actually go away. So for the most part, your job should not be in danger. This is not the time to worry because an acquirer is coming in. But if you've been growth-minded, this actually could be an opportunity for you to step up and take your career to a new level, breakthrough in a way that maybe the original founders weren't ready to support you on.
Acquirers Want To Maximize Shareholder Value And Do The Math
Now, all that being said, the other thing to be cognizant of for acquirers coming in to buy an advisory firm, they will do a lot of math. They're doing a lot of math to figure out if they can justify their cost, if the price point is appropriate, if the cash flows will support it, if they're going to be able to service the debt. They're doing a lot of math. And although acquiring a firm is way more than just a math problem, there are issues of philosophy of the firms, cultural fit, there's a lot of other very human dynamics. But math has to work, and if the math doesn't work, you will find acquirers are not afraid to make adjustments to the math.
So if an acquirer comes in and determines, "You know what, your comp structure, your total pay is fine, but we need to dial down your salary base and dial up your incentive compensation to push you to grow a little more," they're going to make that change. If they come in and find, "You know what, you actually are one of the select few that is overpaid for your job," you may be in trouble. If you are overpaid for your advisory job, an acquirer coming in unfortunately is an opportunity to make a change that may not be very pleasant for you. If you're underpaid in your job, this is a nice opportunity to get a raise, to get a bump, to see a shift.
But recognize that acquirers are still going to do the math, and it's kind of gory, but they're going to go through and say, "If we cut this person, how much salary do we save? How many clients realistically retain? What's the turnover going to go look like? How is it going to ripple through the firm?" They're going to do the whole cold hard calculus, and if your comp is so out of whack for where it needs to be, this may be a danger for you.
Now, again, I've got to emphasize I think this is the exception to the rule. Most of you are going to be fine, but if your compensation really is out of whack, it is fair to recognize the hammer may be coming for you, because a buyer is going to go through everybody's compensation, their duties, what they do in the firm, the revenue that's tied to them, the clients that are attached to them, and figure out whether everybody's compensation and the numbers add up the way that they should.
Read Your Employment Agreement - Non-Competes and Non-Solicits
Now, what should you do? You're an advisor, you're in this situation, you find out the firm is being acquired, what do you need to be looking at and what do you need to be thinking about?
Number one, know the agreements that apply to you in the first place. So did you sign an employment agreement? Increasingly you probably have, particularly if you're in a mid to large-sized firm, because they're becoming standard. That employment agreement will dictate who owns the client... not that anybody owns a client, but is the client technically yours or the firm's? Increasingly you're going to find the clients are clients of the firm. If you brought in the client, does it get treated differently than if the firm gave you the clients? That may vary by employment contract.
Do you have a non-compete about going out on your own, if you're thinking about it. Do you have a non-solicit? Important difference. Non-competes basically say you can't go do this job anywhere else. Those are actually very hard to enforce because the courts don't like to tell people, "Oh yeah, you've been trained as an advisor for 15 years but you can't work as an advisor." And depending on what state you're in, you may find that even if you've signed a non-compete, the employer cannot actually bind you to it. It's bogus, it's BS. Not true in all states, but true in many states. Non-competes are often not actually enforceable, sadly they're basically just there to scare you.
Now, the second layer that's a little more valid is what's called a non-solicit. A non-solicit says, sure, you can go and be an advisor somewhere else, but you may not contact or solicit your old clients to come with you. Those you need to be careful about. They're much more enforceable, and courts look at [violations of] them more harshly. So you really need to know what that thing says. If you're thinking at all about the possibility of leaving, you need to go through the details of that agreement. And realistically you need to find an attorney that can help you read through and understand what is and is not enforceable in your state. This is a state law issue, so you have to go to your state and understand the dynamics of your agreement so that you even know what your choices are.
Now, for most of you, frankly leaving is probably not going to be your best option. First of all, it's a rough transition. I'm certainly an advocate for advisors who want to go out there and start their own business to do so. We've got XY Planning Network to help many advisors do that, but it's a hard transition. You go through a huge, what I call income gap, which is when you walk away from that salary you used to have and try to replace it with the revenue of clients you either bring with you or you go and get, and it takes time. Your income goes through a big dip, that can take years to get back to where it was.
Now, if you're so focused on being an entrepreneur and out on your own, more power to you, you're going to make that jump, and I wish you the best of luck. But frankly, for most of us, we'd rather be employees and work in a firm with someone that gives us the salary, the benefits, and we don't have to worry about the stress [of ownership]. We just want to make sure we're holding on to our job, and ideally growing. And if you have that kind of growth mentality, actually sticking with the firm, with the acquirer, is almost certainly going to come out better for you, because they are going to appreciate you probably more than your prior owners if you are a growth-minded advisor.
Knowing Your Numbers Gives You Leverage To Negotiate Your Advisor Compensation
Now, you still need to know what I call your numbers. And your numbers are, how many clients do you have? Who did you bring in? How much revenue are you responsible for for the firm? What's your growth been like in terms of clients and dollars and revenue? Do you have a demonstrated track record of helping to grow the firm and the client base?
The more of that that you have and you can demonstrate and you know your numbers cold, you will impress an acquirer who's going to say, "Jeez, this person is really on the ball for helping to grow the business. I want this person around." Which puts you in a much better bargaining seat to say, "All right, well, I would love to stay around. But I want better compensation, I want bonuses when I bring in clients."
And you might even put on the table as an advisor on the firm being acquired, "You know what, if you're going to buy this firm and you want me to stick around, I'm interested in equity and buying in as well. So I don't want the founders to sell you 100%, I want them to sell you 95% and I want a 5% slice." That's a commitment from you to grow the firm, and the acquirer may actually be very interested because that means you're really excited to grow the firm and you'll have skin in the game. And ironically if you've actually been wanting to buy into your firm and been struggling to do so, expressing that interest to the acquirer may be an opportunity for you as well.
Now, depending on the acquirer, not all will entertain this possibility. Some have their own ownership structures that are not conducive to this, but it could be a possibility on the table for you. It's certainly a legitimate conversation to introduce. And the more revenue that you're responsible for, the more clients you're responsible for, and in particular, the more you've contributed to growth, the more interested an acquirer probably is to either give you a chance at equity or at least to give you better compensation and a better deal to stick around.
Advisor Mergers And Acquisitions Rely On Client Retention
So just recognize this dynamic that acquirers coming in are very concerned about retaining clients. In a relationship business, that generally means retaining staff and advisors, too.
The closer you are to the client relationship, the better it is for you. If you're an advisor that's directly responsible for clients, that's good. If you're an advisor who supports another advisor that's responsible for clients, that's still pretty good. The folks frankly who are most likely to see jobs change, potentially dramatically in acquisitions, are operation staff, because often the operation staff are redundant between the acquired and the acquirer and those are sometimes the jobs that get compressed out. But if you're an advisor, yes, it's going to be some change. Though it may actually be good change for you.
There is going to be some cultural change as well, and that's actually usually the biggest disruption for firms that go through an acquisition process. It's just all the cultural dynamics that begin to shift when a new acquirer comes in that just has a slightly different way of doing things. Even the firms that are really well-aligned, it's virtually never the same. There will be some disruption. But if you are responsible for clients, and in particular, if you've been responsible for growth, as Jason is in his conversation here, I'd encourage you to actually look at the news "my firm is being acquired" as an opportunity for you. It's not bad news, it can actually be good news. It can be the opportunity for you to break out your career to the next level without needing to go out on your own if you didn't really want to in the first place. And of course, depending on the nature of your non-compete or non-solicit, you really may not be able to go out on your own anyway without a whole lot of messiness.
Now, that being said, one of the other dynamics you often see for acquirers is when they're coming in, they're going to require you, the acquirer will require you to sign a new employment agreement with the new firm, that almost certainly will contain a fresh non-compete or non-solicit (whatever is valid in your state) if you didn't have one already. So you are going to have what I call "the moment of truth" when you're asked to sign that agreement about whether you really want to stick on board. And for a lot of you, that's going to be a take-it-or-leave-it agreement. There's not going to be a lot wiggle room in that.
But again, if you have client relationships, if you're closest to the client and particularly if you've been driving growth, don't always take that employment agreement as it's handed to you, going back not to your founders, not to your current owners, but to the new owners and saying, "Hey, I just want to talk to you directly. I'm interested in sticking around, but I want to be a part of the future of the growth of the firm, and in order to do that, I need this employment agreement to look different." Recognize that you do have at least a little negotiating leverage that you can use on your behalf. Acquirers want to hear about retention and growth. If that's the story you can tell, there's an opportunity for you to get upside out of an acquisition for yourself in addition for your founders getting out as well. Not unlimited leverage, but you do have some power to negotiate for yourself.
So I hope that's been helpful for you as some food for thought about the dynamics and what to do if you find out that your advisory firm is being acquired. Thanks again for joining us on Office Hours with Michael Kitces, every Tuesday, 1 p.m. East Coast time, and have a great day!
So what do you think? Have you ever been through an advisory firm acquisition? How did it change from the employee advisor's perspective? Did you get a better deal in the end, or was it worse for you? Please share your thoughts (anonymously if you wish!) in the comments below!