CHICAGO - There's a big difference between succession-planning practice sales and other kinds of deal activity, advisors learned during a succession-planning panel Wednesday.

When a firm owner is considering selling or merging his firm to reach succession-planning goals, “the price isn’t what matters,” advisor Bob Bilkie, told advisors at Envestnet’s second annual Advisor Summit.

What really seals the deal? "The terms do," said Bilkie, president and CEO of Sigma Investment Counselors in Southfield, Mich.

That's not to say price doesn't matter at all. The rule of thumb for valuing a practice is four to six times EBITDA, or one to three times revenue, said Matt Springer, managing director of advisory services for Envestnet/Tamarac, at Wednesday's panel.


Yet the advisors who had recently completed succession plans agreed those numbers were just one element of a process with many variables -- including a firm's average asset size and average client age.

Other succession planning insights from the panel included:

  • Understand your valuation: Discovering how his firm was valued on key metrics like assets under management, average revenue growth rate, average fee charged and recurring revenues was a “valuable exercise,” said Kenneth Landgraf, president and chief executive officer of Kenjol Capital Management in Austin, Texas. Don’t expect to get many points for non-recurring revenues, he added.
  • Outsiders get mixed reviews: “One thing I would not do again is bring in consultants,” Bilkie said. “Sometimes they just slow things down.” But Greg Friedman, chief executive officer of Private Ocean Wealth Management in the San Francisco Bay Area, disagreed. “We found executive coaches to be invaluable,” he said. “They weren’t involved in valuation, but they gave us great ideas on how to integrate and move forward.
  • Culture matters: When succession planning is tied to a sale or a merger, “culture trumps strategy every time,” said Friedman. He described the long (and sometime painful) process his  firm  experienced after combining with a neighboring firm.

Despite having the best-laid plans, sorting out personality and philosophical differences proved critical to setting its long-term direction, Friedman said. Key executives need to take time for “philosophical discussions” about the business, he added: Some advisors in the firm thought the epitome of client service was returning client phone calls promptly, for example, while others expected to be able to anticipate clients’ needs.
“It took three years to sort everything out,” Friedman said. “In terms of integration and succession, goals, objectives and expectations are so key. We had lots of socializing and staff meetings, and 60% of the wealth managers still left.”

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