Ep 351: Facilitating Successful Advisor Mergers & Acquisitions By Avoiding The Conflicts Of A Success Fee With Jessica Polito
Sep 19, 2023
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Jessica Polito, Founder and Principal for Turkey Hill Management, discusses facilitating successful advisor mergers and acquisitions without conflict of interest. Topics include: navigating challenges of selling a financial advisory business, considering factors beyond price, understanding reps and warranties, types of buyers in financial advisor M&A, addressing conflict of interest, typical retainer fees, balancing multiple clients, starting a consulting business, and defining success.
Valuing wealth management firms can be complex, with considerations of EBITDA multiples and revenue-based earnouts depending on the circumstances.
Reviewing terms and conditions, such as employment agreements and non-compete clauses, is crucial in evaluating the outcome of a deal.
Timing a sale should be based on comprehensive assessments of financial health, personal circumstances, and thorough due diligence.
To evaluate offers effectively, engage in thoughtful discussions, conduct due diligence, and potentially seek guidance from an M&A attorney.
Deep dives
Valuing wealth management firms based on EBITDA
Wealth management firms are typically valued based on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). This approach is used because expenses can vary greatly among firms. Placing a multiple on revenue alone can overestimate the value, as expenses may differ significantly. However, there are cases where revenue multiples are used, such as when a firm is new or experiencing aggressive growth. Additionally, revenue-based earnouts may be used when integrating firms. Ultimately, the choice of valuation method depends on the circumstances of the firm being sold.
Considering non-financial terms in a deal
Price is just one factor to consider when evaluating a deal. Other terms and conditions can significantly impact the outcome. Some important aspects to review include employment agreements, non-compete clauses, representation and warranty sections, and indemnification provisions. Compiling an accurate picture of the deal requires a deep understanding of the potential partner's expectations, growth strategies, investment process, marketing approach, and integration plans. Each firm has unique needs, so it's crucial to have open and transparent discussions to ensure alignment and mitigate future issues.
Timing and future considerations
Timing a sale based on market conditions or earnings fluctuations can be challenging. Waiting for the perfect moment may be counterproductive. The decision should be based on comprehensive assessments of the business's financial health and growth potential. Additionally, personal circumstances, like retirement plans, should be taken into account. It's important to engage in lengthy conversations, conduct due diligence, and seek advice from professionals to gain a full understanding of the potential partner's culture, capabilities, and future growth plans.
Understanding the intricacies of valuation
Valuation of a wealth management firm involves various factors and can be complex. Apart from financial considerations like earnings multiples, negotiations often involve non-financial aspects like compensation structures, employment terms, client fee arrangements, integration plans, and individual preferences. To evaluate offers effectively, it is crucial to engage in thoughtful discussions, conduct thorough due diligence, and potentially seek guidance from an M&A attorney to ensure all terms are clarified and aligned with the seller's goals and aspirations.
Key Point 1: The importance of reasonable expectations
When considering a deal, it is crucial to have reasonable expectations about the market and the value of your business. Factors such as the size of the firm, growth, margins, and age of the owner can all impact the multiple and valuation. Understanding the different buyer types and the scarcity value associated with certain firm sizes can also affect the final deal.
Key Point 2: The role of retainer-based M&A advisory
The traditional success fee structure in M&A advisory often creates a conflict of interest, as advisors are incentivized to chase the highest price and close the deal. The alternative approach of a retainer-based model removes this conflict and allows for a more aligned partnership between the advisor and the client. By charging a monthly retainer fee, the advisor is motivated to work toward the client's goals, rather than focusing solely on closing the deal.
Key Point 3: Running the business and building value
Throughout the process of considering a deal and engaging in M&A, it is important for advisors to continue running their businesses and making decisions based on the best interests of their clients and the growth of their business. Building value in the business is a critical factor that will attract buyers and contribute to a successful sale, so advisors should focus on client satisfaction, growth, and operational efficiency alongside any potential M&A activities.
Jessica Polito is the Founder and Principal for Turkey Hill Management, a mergers and acquisitions consulting firm that assists financial advisors with the sale, acquisition, integration, or merger of their firms. Jessica stands out for her specialized practice in assisting financial advisors and firms, offering comprehensive guidance—from understanding business goals and educating clients on transactions to valuing firms—all without the conflict of an investment banker's success fee.
In this episode, she delves into how her investment banking experience informs her unique approach to offering independent M&A advice, as well as why she advocates for a flat-fee model to ensure unbiased counsel. She also shares invaluable insights on navigating the complexities of potential buyers and discusses her personal and professional definitions of success, which include combating imposter syndrome through thought leadership and setting a resilient example for her children.
