Growth

Rich and Co.

Current Market for TPAs, RIAs and Professional Firms

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Bill,

Let me offer some answers to your questions.

What is the market like these days? More buyers than sellers or vice versa?

The next 6 months are a window for selling. With the current administration likely to be reelected and taxes likely higher, buyers are eager. In addition, most potential sellers have not yet focused on the challenge of funding their retirement and estates with a liquidity event.

More buyers but that will not last long as the generation of Baby Boomer owners start to seek liquidity.

Well-run and growing firms are rare however. Many owners have disinvested in the businesses during the financial troubles so need equity, technology and sales, staff investments to reach their potential.

If a firm is growing and has solid distribution, new product and sales potential — we can get a premium multiple. Investment fee revenue always receives a premium.

I make a point in my work to find an optimal partner. I have been able to do that.

For a medium size non-producing w/ $2m in annual revenue, what would be the expected purchase price? What is the average multiple (on annual revenue) being used these days? 1.25x? 1x? What is the average length of time on the repayment schedule and average down payment?

We would start at 1 times revenue. Typically, 50% down and then the remainder over 2-3 years. Starting with that norm, necessary investments to keep the business steady decreases the short term price but may raise the long term payouts.

Solid growth resources boost the multiple and terms. Unfairly, buyers typically use the revenue of the firm to pay for the acquisition. I work to get them to put some capital at risk as well. I have more leverage if I represent the buyer as well.

The roll-up model has been uniformly a bust. However, I saw this coming so have access to other strategic buyers and sources of long-term capital.

How are you able to pursue the best interest of both buyer and seller at the same time? This seems contradictory.

We have successfully represented both buyers and sellers in transactions.  Here are some of the practical factors that have allowed this to be successful for both sides.

  • It is fully disclosed to both parties.
  • We bring an expertise in the details of these businesses that other constants do not have.
  • Over 20 years of experience.
  • The seller can always request as many buyer opportunities as wanted.
  • We are a independent third party that has balanced interests.
  • The transaction fee is shared by both parties, resulting in savings.
  • Rather than face an auction situation, which is often sub-optimal, this provides a more focused and optimal negotiation process since we are hired to have a successful transaction, representing both parties long-term interests.
  • The buyer is always motivated to NOT have other buyers introduced, providing leverage

Finally, the seller, with full transparency, makes the final decision. As buyers, we only represent firms we have fully vetted and done extensive due diligence on.

We also have specialized and proprietary ESOP resources which we’ll discuss.

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Written by Rich and Co.

September 13, 2012 at 1:12 am

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