As we work with potential sellers (most of who are not interested in retiring anytime soon), we must have the conversation about the “currency stack” they would like to have. We are talking about the consideration being paid for the business they are selling when seeking a partnership with the larger RIA.
Usually there are three forms of currency that you could elect to take the price paid for your business in.
- Deferred Cash (cash paid over time)
It is a balancing act to match what your preference is with the buyer who checks all the boxes in what you’re looking for AND who will offer the form of currency you seek.
Most people assume cash is the least preferred currency offered by a buyer. Not true. Most quality buyers prefer to pay as much is cash is possible. New firms who haven’t done many acquisitions are usually the one who want to transact with more equity, because their equity simple isn’t worth as much.
In fact, the more valuable a buying firms’ equity is, the less interested they are in using it to buy other firms. Cash is the cheapest form of currency a firm can use to acquire your practice with. We often have to clear this misconception up when speaking with sellers who don’t need cash today and would otherwise elect to roll as much of their valuation into the buyer’s equity. Finding a buyer who would be interested in doing a full equity swap is much harder than finding a buyer who would pay all cash.
The reason is simple. The equity of the successful firm (the buyer) who demonstrates the ability to grow both organically, and inorganically (acquisitions + recruiting) is worth a lot of money now, and more so in the future. Therefore, they only want equity in the hands of partners who can grow the business long term. Most smaller firms don’t grow very much when you back out market performance. While it is true that firms (sellers) who partner with large firms to reduce operational burdens, improve their practice management, and embrace niche organic growth strategies do grow much faster than they did pre partnership…but the buying firm is the one contributing that “lift” to you. So, they prefer to keep as much of the value creation in the people driving that growth.
We see most equity rollovers in the range of 20-40% of the typical transactions. When a buyer is stingy with their equity….that is a good sign they believe it has real value. When they want you to take the majority of the valuation in equity, that’s when you need to roll up your sleeves and dig into their financials to determine if it’s a bet you wish to take.
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.