Kicking the Deal Can Down the Road

Kicking the Deal Can Down the Road- Evaluating when is the right time to transact

Easily one of the most common issues we deal with, particularly with fast growing firms, who otherwise would be interested in seeking a partnership with a larger firm via acquisition, is when should they do it?

We go through a lengthy and through valuation process with them that tells them what their business would be worth today should they transact. They will typically do some back of the napkin or excel spreadsheet calculations that show them if they stayed solo, and continued to grow their value would increase exponentially, perhaps even hitting some EBITDA multiple expansion along the way. So they come to the conclusion they should just wait it out.

Is this a logical thing to do?

I would argue that certainly you should seek to compare selling today, versus staying solo. But we need to make sure we are evaluating the two options properly.

Start rooted in reality

It is easy to project a linear growth pattern to your current P&L into the future. Simply apply an annual growth rate to your revenue, and watch it blossom. We do this all the time when running financial plans for clients.  However, like the flaw of inputting an avg growth rate into the software (we all know those avg growth rates don’t mimic real life), assuming an avg rate of growth in your practice will likely not resemble the future. Anything can happen, market declines, client terminations, disruption with your partners or team. As you grow, it becomes more difficult to maintain the percentage growth year over year. At some point to continue the growth you will be forced to invest considerable sums into your infrastructure.

The future is unpredictable, yet we don’t see many firms who actually account for this when creating their proforma projections of growth.

Comparing a transaction to staying solo is not apples to apples.

When you monetize any portion of your current practice, assuming you took any portion in cash or deferred cash, you are “de risking” your current asset. If you remain solo, you are fully retaining the risk, 100% risk on. So comparing retailing 100% risk, to  for example de risking 50% of your asset (if you took 50% of the valuation in cash) would be akin to comparing the performance of a 100% equity portfolio, to a 50% equity/ 50% cash portfolio. One should produce a higher return over time, but its also twice as risky.

Allen Darby is CEO of Alaris Acquisitions, a mergers and acquisitions consulting company for the wealth management industry. Contact him at allen.darby@alarisacquisitions or by telephone: 704-756-7160. Book time on Allen's calendar here.