I'm pleased to introduce the first session speaker, Marcus Haygood. Marcus holds his Series 7, 63, and 65 securities licenses with a degree in international economics, which makes him a really smart wine connoisseur. Okay, so feel free to ask him a lot of questions about it. It's all good. With 25 years of industry experience in multiple roles at TD Ameritrade and Securities America, Marcus' varied experience has included everything from recruiting financial professionals to work to develop the first-ever online brokerage window in the 401k platform. Please help me welcome Marcus Haygood. Thank you very much. Thank you all for having us. It's always a pleasure to be here at the NAPFA event and to work with the NAPFA advisors, and we really appreciate the long-term relationship that we've always had with the NAPFA organization. So thank you for having us, and thank you for letting us speak. As you said, I've been in the industry for 25 years. I've had some interesting background. I've worked at a clearing firm. I ran independent broker-dealer business through that clearing firm. I have recruited advisors. I have worked at FP Transitions now for 10 years, helping advisors understand, identify, build, and realize the value that they have built in their organizations. So today, I was a little intrigued for today's group. I wasn't sure what to expect. The title of this presentation really is focused towards the next generation. So, you know, I was interested to see the faces and what the age demographics looked like, and generally, we do these presentations on the market for financial advisors, and there does tend to be a common theme in the people in the room. So I'm glad to see some young faces. Thank you for being here. This is geared a little bit more towards you, but I will talk in general terms about what's happening in the marketplace today. So what do I hope you guys get out of this, or what am I going to talk about a little bit? I'm going to talk about the current market for financial advisory firms. What do multiples look like in today's market? What are the common market drivers, what's happening in today's financial advisory world that is changing or that has changed specifically in 2023, and what are the market realities? How do advisors transition their practice? What does that mean? How do you value businesses? Those are some of the things I hope you can walk away with after this presentation and have a little bit better understanding of. And then finally, what does it mean to transition equity ownership, and what does it mean, or what do we mean by building the next generation of equity ownership and building sustainable businesses through succession planning? So those are the core things I'd like to talk about today and hopefully give you some understanding. This slide is geared around a conversation about the industry itself and the noise that's out there. There's a lot of people like FP Transitions, Devoe and company, Echelon Partners, Tiburon, we all get data, we all put it together, we all crunch it different ways, and we all spit it out in different ways. And unfortunately, a lot of that data creates noise in the industry that may or may not be relevant to you, may not really represent a good view for your business to look at. So this is just a chart that shows FP Transitions this year so far. We've done about 160, call it 170 transactions to date. We've got the two busiest months coming up, so we will probably end up well over 180, but to be seen yet. As you can see, some of these other entities out there, Mercer Capital, Fidelity, Devoe, Echelon, they've all published somewhere around 200 to 300 transactions a year. I think Devoe's statement is real deals. You know, what does that mean? Are there really only 200 transactions in financial advisory practices every year? The reality is no. We think there's probably close to 1,300, 1,400, 1,500, maybe even more. The reality is real deals or deals that get published tend to be really large transactions and aren't really relevant to the vast majority of you in this room. And so when those data points come out about multiples assigned to those transactions, you know, maybe they're somewhat relevant to the industry as a whole and important for sure, but they may not be most relevant to what is happening in your life or what will happen in the businesses that you look at potentially buying, especially as a next-generation advisor. So just know there's a lot of talk out there. Some of it makes sense. Some of it doesn't. I'm gonna start with talking about a little bit about, you know, what are the market drivers or what's happening in the industry, especially in 2023. Obviously, everyone's heard the storylines around the aging advisor. I think J.D. Powers was the last number I saw published last year, 2022. The average age was 57, which is a little different than what Tiburon has produced. I think Tiburon's number was somewhere around 60, 63, somewhere in that range. Certainly, as advisors age, that is a driver of market activity for financial advisors, financial advisory practices that are going up for sale. That will continue to be a driver. I think there's 300,000-plus advisors in the market as a whole. That's including captives and everywhere else. So if you think of it as 1,500, 1,300-ish a year that are selling, that's the defined market. It's still a pretty small market overall. Again, FP Transitions doing about 170 of those transactions. We represent somewhere around 10% to 20%. But we do represent that 10% to 20% that tends to fall in the vast majority of financial advisors' ranges of business, right? Somewhere between, say, you know, 50 million in AUM upwards of, you know, a billion in AUM. So that's the vast majority of our transactions. The data that I'll talk about today falls in that range. Talent acquisition, another big driver of what's happening in the market this year and in the last year as well, retaining and attracting top talent is getting harder and harder. It's getting more expensive. Again, as advisors are aging, as their businesses continue to grow, both in size and value and complexity, they have to bring in other financial advisors to help them to continue to grow that business. That adds a whole other level of HR concerns, business concerns, staffing employment. All of those things are challenges for financial advisors, especially those that are solo practitioners or smaller businesses, that helps drive or affect the thought process of a founder of the business. Consolidation. So, obviously, a lot of conversation about this from the perspective of P.E. money coming into the industry. I mean, obviously, we've just gone through a five- to ten-year period of very, very low interest rates where market monies were flowing in looking for places to find good investable situations. Financial advisory practices were good ones because they're steady, recurring, reliable revenues. And so P.E. money has come in. It's funded big firms at the top of the market who are buying smaller firms downscale in the market and rolling them up into the firm. So consolidation is happening in the industry. It is one of the big market drivers. It is one of the reasons that values have gone up. It isn't the only consolidation that's happening. Consolidation is happening at every level, even in the middle of the market where average advisors are meeting each other and finding out that, hey, I do this really well. You do that really well. Together, we can make this even better. Merger transactions, those are consolidating the industry. And then, finally, sustainability. We talk about it as succession or you hear about it as succession. When we talk about sustainability, we're talking about building practices that can last the entire length of the wealth management career or wealth management lifecycle of a client. Most advisors, their personal clients are roughly the same age, five- to ten-year bands on either side of themselves. Those people have wealth needs over the long haul. Their clients do. And if you don't have multi-generational staff, if you don't have a sustainably-built business that can service those clients long-term, then you're not really serving the needs of your clients as a fiduciary. So that is another thing that is driving people to make decisions, first-generation owners. We talk about G1, G2, G3. Those are generational owners. So building a sustainable business requires you to bring in those next-generational owners. So get to the slide that everybody loves and that everybody wants to come and talk about. See, I'll give some perspective. So these are the numbers, the most recent numbers that we have seen in the markets today. And we personally, FP Transitions, quote the market in gross revenue multiples. The reason we choose to use gross revenue multiples is because it's the least-manipulated multiple. So it gives you the best, most accurate picture of what businesses are truly trading for. Earnings multiples are great. They have their purpose. They certainly are usable. But in this industry, where compensation tends to be one of the biggest drivers, especially the personal compensation of solo advisors, that's one of your biggest expenses on a P&L. It's hard to truly get down to bottom-line earnings and use that accurately across everybody to compare apples to apples. So the range right now, again, you can see there, RIA is 2.7 to 3.35. RR hybrids, so firms that are doing some business that is commission-based, they have a tendency to be at about 1.48 to 3.31. Those are pretty broad ranges. I get it. But there's a lot of stuff built into those things, right? Deal structures, types of business that are done all affect what those end multiples are. Also, I'd like to say that on these multiples, you can expect about a one-standard deviation on either side. So this is the refined range of the multiples. So certainly, have you heard of people trading for four or five times revenue? It does happen. Is it common? No. Still very, very rare. Some of the other key components of deals, deal structure, what's happening in the marketplace, cash at closing. Historically, so let me give some historical context. I joined FP Transition about 10 years ago. 10 years ago, you were lucky to get about 10% to 20% down, 30% maybe. Five years ago, 30% was kind of the norm. Now we're looking at 50% as kind of the norm for financial advisory practices down as cash. So if you're a younger advisor and you're looking to acquire a book of business from another advisor, be prepared to get out a checkbook or be prepared to go have a very long conversation with a bank. And in today's marketplace with rising interest rates, now looking at, you know, bank loans in excess of 7% to 10% interest, those become very, very hard conversations for a lot of younger advisors. So again, next generational advisors looking to acquire. There's other ways to go about it, but if you are just looking to acquire the business straight out, that's what you're looking at. Tax allocations, not that it's a huge component of it, but it does affect the cash flows of the transactions. 93% of what is being sold in these asset-based transactions is goodwill. 5% is usually assigned to consulting work that the seller does post-close, generally for about 12 months. And 2% is for restrictive covenants, which are usually in line with, you know, the five-year note that is typically the remainder of the deal. So if we talk about what does the deal look like, again, for an RIA firm, you're talking about 50% down, typically the remainder is on a seller-financed note, usually with a one-time look-back that says if, after 12 months, 90% of the revenue is retained for the business, the full value will be paid on that five-year note. That is still the prototypical view of what deal structure looks like in transactions today. As I said, we're at, I said 170 transactions, we're at 165, I'm sorry, I rounded up a little bit. That still represents a 10%, and that's really only where we're at right now, so we still have two months to go. That represents a 10% increase year over year. So one of the big statements out there, I was talking about some of the miscommunications or data that's thrown out there into the universe, you know, some of our, some of the pundits in the industry have said, well, with interest rates rising, values have to come down, and deals will definitely slow, right? Well, we did see some slow down towards the first part of the year, but I will tell you it had more to do with where transactions from the previous year were going and pushing into the new year than anything else, and the reality is we've continued to truck on through, and the market is up 10%. So very, very strong. Inquiries per offering, if we put a business out for sale, generally we're getting somewhere between 50 and 100 inquiries on that. You can see the average is 90 and 55, depending on the type of business. So very, very strong market still for financial advisory firms. There is no disincentive at this point in time to not monetize your business if you want to. Yes, sir? I'll talk a little bit more about that as we go through the slide deck, but just to answer your question, and the question that was asked was, what makes the range so different between firms? Right. Right. Correct. Why is there such a range between the firms that are in the marketplace? What it really boils down to is the components of the book of business. So you start with something like revenue, a $500,000 revenue stream versus a $1 million revenue stream versus a $5 million revenue stream. Buyers will pay more for the $5 million revenue stream. Everything else left equal. Then it talked about things like growth, a growing firm versus a not growing firm. Certainly going to be paid more for a firm that has growth. Staff components can play into that. You have the demographics of the clients. What are the ages? What are the likelihoods that those client revenues will continue off into the future? All of those things play a role in coming in at some point in that range. Yep. Which leads us into this conversation around valuation. Perfect segue. Thank you. There's really kind of two different approaches in this industry to value a business. FP Transitions has been doing this for 25 years. There's the market approach and the income approach. We are well-known for our market-based approach to valuation, which is literally taking the fact that we do about 100 to 200 transactions every year, and we look at those transactions relative to whatever your data set is. Is your book older? Is your client base been with you for a long time? Are they relatively young? Are you charging enough for fees? Is that revenue stream really large or maybe not so large? All these things go into looking at the qualitative and quantitative aspects of your book of business, and the market-based approach assumes a lot of things. It assumes that you're going to sell to another advisor. It assumes you're going to sell and you're probably going to leave that business. It assumes that that other buyer is another financial advisor who's ready to take on that book of business and isn't going to have to spend a tremendous amount of money to continue to operate a whole new set of clients. Those are a lot of assumptions that are built in. Is it accurate? Plus or minus 3% to the actual transactions when we back-test it versus the transactions we do. So, yes, it's highly accurate, but it's a benchmark view of value. It is what you can sell for. If you sell it and you walk away, it isn't necessarily going to represent what the income approach to value does. So the income approach to valuation is looking at it more from an equity perspective. If I were to invest in your business, what would I want as a return on my investment, right? And why do people invest in businesses, right? They want upside. They want the business to grow in value, and they want profit distributions, dividends, right? If it's a stock. And that's exactly what they're doing when a younger advisor comes into the business and buys equity ownership. That's what they're looking for. They're investing. And so that income approach comes into play a lot of times where mergers are occurring, where young advisors are coming into the business and buying equity over time through a succession. So what is the difference? Well, you're primarily valuing the enterprise value now of the business. What is the equities carrying capacity? What does the team look like? What does the P&L look like? What do the systems, the processes do? You still look at the book of business. You still look at the client make up. You still look at the concerns and risks of transition because they're all still there, but you are looking at what is the cash flow of this business over the next few years, projecting it out, and then discounting that back with a discount rate or a DCF calculation. So two different approaches to doing values, different outcomes, different purposes. If you're a younger advisor and you're looking at buying into equity, you should be talking to your G1, your founder, about having them do a valuation on an income approach because all of the carrying capacity of the business, their salary, your salaries, the business expenses, those don't go away. You're not picking it up and dropping it in somebody else's lap. Another sort of view on value or thing to think about on value, what drives value? And really more focusing on the question that was asked earlier, what are the big drivers of value? The biggest driver of value is the size of the revenue stream, the predictability of that revenue stream, and the growth of that revenue stream. Those are your three top drivers of value. So what goes into that, right? Well, obviously, from a predictability standpoint, securities, insurance, and commissions generally are not, I mean, take somebody to go out and sell a product to make that occur. So that isn't as predictable. Fees on managed assets, highly predictable, highly scalable from the perspective of value. Fees on third-party managed assets, same thing. You can see planning fees, tax and accounting, a little bit less so. Maybe your financial planning fees aren't always going to be charged if they're not on a consistent contractual basis that they're gonna do a financial plan with you every year and you're doing one-time planning fees. Those actually are technically less valuable overall. So things that you should look at when you're looking at value, the predictability of revenue is really kind of the big prime driver. So we spend a lot of time on this slide. This is really what we're here to talk about today, right? This is how these businesses change hands. How do they transition? So I'm gonna, again, with the context of the title being what do next-generational owners need to be thinking about in the marketplace for financial advisory practices today? Starting with it, external sale. If you're a younger advisor and you're looking to grow your book of business and you want to acquire, that's the number one way that these businesses transact still today. Advisors older, they're wanting to retire, they don't have a viable internal option, they sell the business to somebody else. But you have to be real about this both with yourselves and with the other advisor. You're buying an aging book of business. Value will be a concern. Do you have the financial capability to sign a check? And outright buy a book of business? Do you have the real backing of a bank to secure a loan that's probably gonna be far more expensive than any home you buy? And can you do that outright? The reality is through our transactions we see very, very, very, very few younger first-generational or next-generational advisors have the financial capacity to stroke that check and buy out a business outright as an external sale. So not a common scenario for younger advisors. However, a very common scenario for advisors as a whole. Sell and stay, merger transactions, both really popular ways of advisors, first-generational advisors transitioning and gaining the ownership of their business. Again, from the lens of a younger advisor, these are difficult, could you merge into an advisory firm, bring your book of business, gain equity? You certainly can. Lot of complications there, right? Personalities have to match, you have to effectively work together, you have to be part of the team, you're bringing your book of business, now we gotta talk about values and what is value of my book of business relative to yours and what does the equity exchange there look like? So certainly does happen that younger advisors can find a home in a larger advisory firm and merge their equity in and become an owner of that business along with the first-generational owners. But it's probably the hardest one to complete and the most complex as far as bringing all the parts together. Sell and stays, really common now in the industry, probably make up over 70% of all of our transactions, probably not real relevant to younger advisors. The sell and stay model is really, I'm gonna sell the business today and I'm gonna monetize what I've built but I'm gonna continue to be employed with the firm. Can happen, certainly does happen on occasion for younger advisors that they have a scenario that works out like that. The big things there, it's highly liquid for the first-generational advisor, right, they're selling it, they're getting their full value out of the business, generally 50% down in cash, the rest on a five-year note and then they continue to work like they have before, continue to operate as advisors. Great answer for a lot of the folks in these businesses that have built them from scratch, this is a win-win for them. So if you can engineer this as a younger advisor, if you can get the capital, if you can make the transaction part happen and you can continue to keep them on board and pay them a fair salary and continue to have them work with clients, it can be a huge win-win but that financially is a difficult and very daunting challenge for most younger advisors. Which brings us to the first one here which is also the most common one when we're talking about looking at this from the lens of a younger advisor looking to buy in. Most scenarios happen through internal succession and what do they require? They require time, they require patience and they require a hell of a lot of work for that first generational advisor who basically has to bring you into the business, train you, teach you, mentor you and oftentimes, most cases, finance you. So stepping back to that conversation on value, I did say, right, value, if you're looking to buy a business, you should be thinking about that income approach, you should make sure you look at that P&L and make sure you deduct all those things from the value that are driving it. Well, guess what? If G1 is going to be the bank, they're gonna charge you low interest and they're gonna let you buy in over time and pay those off on profit-based notes that only get paid if there is a profit, you might wanna think about just accepting whatever value they're willing to provide in that scenario because long run is, it will be good for you, right? Now, does that mean that you write a check for millions and millions of dollars? No, I mean, obviously, it has to make sense but the reality is that is probably the easiest way for a next generational owner of a business to get in and make it really happen. Is it easy? No. Do we see successions fail? Yes. Why do they fail? People don't get along. People are human. First generational owners in these businesses, they tend not to be great business owners. I hope that's not an insult but it's not intended to be. They tend to be accidental business owners. You got into this because you loved working with people and providing financial advice and you are damn good at that. Some of you are really good business owners too, don't get me wrong, but many struggle with the challenges of staffing and HR and performance reviews and real conversations with employees who may not be being very successful. It is challenging, no doubt about it. These are the general pathways. You can obviously move things around, you can have shades of gray in between those, but to paint it finally, this is how people buy into ownership of the businesses and successfully transition the ownership. So obviously I stated that that last pathway of internal succession is the most common for next generational advisors to buy in. And there's a reason why that is the case, right? Talked about it a little bit already, it's financially oriented to a large degree. Most next generational advisors that are in the industry already are not coming in with a huge book of business or are not coming in with a large checkbook. And so this tends to be the only financial option that is available. But it also is about the battle for talent. If you have a highly motivated young person in your business today, and you're not compensating them well, and if you're not giving them a path to ownership in your business, you can check them out in five years, they're gone. Additionally, speaking to capacity and sustainability in the business, if they leave after spending five years with your clients working with them, guess what they're probably gonna do? They're probably gonna take some of those clients. And then you're gonna tell me, well, but I've got non-compete agreements and I got employment contracts and I've got attorneys and they don't. Yes, you're right. It's a good cudgel. But I don't know if you've been listening to the news or watching what's been happening with employment contracts around and non-competes and non-solicits and non-acceptance agreements. They still have power, but far, far less than they have in the past. Goldman Sachs is experiencing this exact scenario with their purchase and blow up of United Capital. How many times I've seen in the headlines in the last couple of weeks, another United Capital group is being thrown into the courts because they left and took their clients. Happens with Merrill Lynch, happens with you name the large firm that thinks they own the clients. The reality is the person that votes is the client. It's not you, it's not your contracts. This is also important for next generational readiness. The firms that have historically trained our industry, the Merrills, the Northwestern Mutuals, the Edward Joneses, you name the name, those firms aren't really doing that anymore. They're not doing it to the degree that they used to. They've circled the wagons, they try and lock down their employees as strongly and hardly as they can, and they aren't training these mass classes of people anymore. There is a talent drain in the industry as a whole. It is real, and the former suppliers of young, fresh talent to the industry just aren't out there as actively as they used to be. Capacity, you need people. One of the huge advantages we have at FP Transitions that we enjoy when we're working with financial advisors is when we pull all that information for your valuations, it's a ton of data. We have this giant database that tells us a lot of things about firms, and I can tell you from that data, it takes one advisor to manage 150 clients, and that's a hard fact. You can argue with me, yes, some advisors can manage 400, I've seen it. Some advisors can manage 20, and it does matter how large the clients are, how complex their problems are, I get it, but it is a pretty hard number that about 100 to 150 clients per advisor is the max you can actually effectively manage, and there's other reasons for it. There's psychological studies that show that's the number of relationships you can build, et cetera, et cetera, but the fact is, if that is a hard fact, to continue to grow as a firm, you have to put another butt in a seat, and if that's what you have to do, how do you attract and retain that talent in this industry without teaching that person how to do it well, compensating them well, and then providing them that path to ownership, because if you don't, again, five o'clock, they're out the door, and they'll do it themselves, because they can. Now, I'm not one that believes what the next guy was throwing around out here at the opening session, that technology's gonna replace advisors. I don't believe it, never have. My industry experience, I started with an insurance firm, Mutual of Omaha, in their broker-dealer. I left there and quickly went to this small company called Transtera Corp. It became TD Ameritrade. I was part of that revolution of technology that allowed internet trades to come to the market. I mean, literally, it was not that originally. It was a telephone system, and then that was connected to a website, and it printed out in my office, and I ripped off the printout, and I actually put the information into the system, and there was an old ad where they showed a guy falling asleep in the box, and the trade orders were just piling up on top of him. That was the way it worked back then, right? But it was revolutionary. It took trade commissions from $175 down to $5 a trade, and now they're free. So was that revolutionary? Hell yes, that was revolutionary. Did it get rid of you? No. Takes a person to relate to a person, and yes, AI is getting better, and yes, AI could fool people maybe in the future. I still think people deal with money differently than they deal with anything else in their lives, in their assets, and they need a human being to talk to about that. So again, capacity, sustainability, growth, all of those things are reliant on you as advisors sitting in front of 150 clients, and that's why succession works. That's why building a sustainable business and allowing next-generational talent to buy into that business and into the equity of the business works. The finances side of it works, but it is work to make it work. You have to be engaged in being a business owner, you have to continue to operate the business, and you have to mentor that next generation. What are the elements of succession for a younger advisor? This is a slide that really doesn't speak to you. This is a slide that was developed for G1. So I'll speak to it as G1, but I'll try and bring it back. So if you are a business owner today in this space, you should be planning your trajectory. I assume you are all planners if you're in this room. If you haven't planned for your own business and your own business's future, come talk to us, but also you should be, right? Whether it's a simple business or a marketing plan, or whether it is a full-on succession, how am I going to actually sell this business in the future, or exit strategy, all of you should be mapping that out. All of you should be thinking about what is my endgame with this business? A written plan, not just, I'm writing it on a napkin, a formalized document or set of documents that says, here's my timeline, here are my people, here's what I'm gonna compensate them, here's how they're gonna come into and when they're gonna come into ownership, how much I'm going to sell them. And then, obviously, you have to set the goals and the timelines and the timeframes for all these things to get it all written down, right? It's just like running a financial plan for your clients. You have to know when they wanna retire, right? When you're doing it for your business, you have to know when you wanna retire. You also need to be thinking about, if I sell or if I'm a younger advisor, if I'm buying, when am I getting majority stakeholdership in the business and what does that mean for me? And am I training that younger advisor to take over the responsibilities that really do happen or transition for real when they become more than a 50% stakeholder in the business? Valuation and benchmarking. Obviously, this is a bit of a plug, but if you don't know how big the bread box is, how do you plan for it? It would be like if a client came into your office and said, eh, I've got these assets, I want you to manage them, and you never asked them what those assets were. That just doesn't work. The benchmarking part of it is, okay, you've built a plan, you've designed it, you're tracking it, you know where you're gonna sell shares, but are you effectively marching towards that end goal? And do you know you're actually making the progress that you should be making? Are you growing at the right rates? Is your business strong where it needs to be strong? Are your people doing the things they need to do to prove that they are next-generational owners and that they're capable of taking over the control of the reins of the business? All of those are things that you should be looking at yourself versus your peers to make sure that you are tracking, that you are getting that progress to your end goal. So what does a succession plan look like? Typically a succession plan starts slow and takes a long time to occur. Most of them are somewhere between four and six truncheons of sales. So we call them truncheons every time you sell equity ownership in the business. So let's just use five as the sample because that's pretty typical. The first trunche generally is very minimal but should still be significant enough to make that person an owner of substance in the business. So if you're a next generational owner your first buy-in to equity should be somewhere around five ten percent. Now if your business is you know that you're buying into is hundreds of million dollars in value probably not realistic but maybe it's one percent maybe it's a half a percent. But for most of these firms five to ten percent is the number for that first transaction. You're gonna buy into it generally at little to no down payment and this is where the the owners of businesses go no not gonna happen. I want them to have some skin in the game and they do. They're becoming an owner but they generally just don't have the financial capability of writing a check for even ten percent of a down payment on what most of these businesses are worth today. So there's a lot of calculations done to figure out what is the right percentages of down payments for the initial trunch but again most often it's zero. And then day one as they're in it when they're an owner they write that sign that agreement and all of the contracts and contractual arrangements of ownership in the business they get a profit distribution. The next time you do a profit distribution what do they do they take that profit distribution they pay the taxes on it and then they pay you the note payment. And that's your payback is the G1 and that's your expense as the G2 G3 whatever it ends up being. And that's how they pay it off. Hopefully if the business continues to grow if they do what they're supposed to and help you grow it that growth will pay off the note and it will generally pay it off faster than that five-year time. And that's what you want to see that's one of the key performance metrics you want to look for is that growth rate that makes this work. Because if there isn't growth that's where these things start to fall apart. That's where you start to see pressure on the business. Second trunch generally another five ten maybe twenty percent. A lot of four trunch plans you want to get them to about thirty percent ownership in the business. At that point they can go to a bank and the bank will finance the deal. So if you have a G2 team that owns thirty percent of your business equity or more banks will be happy to finance that deal all day long. But if you go out the full four years five years in a plan six years in a plan ten percent at a time that's a slow transition. You know at some point at the end of that is the final check right. That's when you're ready to retire you're ready to go below that 50% threshold of ownership ready to give up control. Hopefully by that point in time you're for your team is ready to go everybody's ready and you've successfully transitioned or bought into the ownership of the business and bought out the original founding owners. Usually takes two next generational owners for every single generation one owner and three generation three owners to create a good structure that financially works. So if you think about that that's building out a team. A lot of this is human dynamics in the business. It's about how does that team work together and what are the skill sets that that team needs to have to be successful at finally buying out those first generational owners. A lot of first generational owners go into this thing you know with the thought process of okay I'm gonna do this succession thing I need to find somebody who's exactly like me. I will tell you it's the exact opposite the ones that are successful at it most successful at it they find a team that successfully replaces all of the things that they do for the business but that's not their strong suits in and of themselves. Somebody might be really good at sales somebody else might be really great at operations and it's the combination of those two that make the business better than it was with an owner that was trying to do it all. Yes sir. It's not common it does happen usually about a three to one ratio producer to non producer and that look there's just the natural reason for it right the business this business is a people business the people that are generating most of the activity and revenue that results from that activity are those people that are in front of clients. So generally it is mostly front office advisor client facing people that are the owners our future owners of the business. Not always the case though there is a case to be made for a very strong back office strong non non owner operational person to be in ownership as well. Thanks for the question. This last slide is sort of a throw in I'll get right to you in just a second. It's a throw in but it's probably the most important slide that I'm showing you today. The vast majority of people in this industry do not have in place a what happens to me and my business and my clients if I pass away and I'm not there. And most of them do not have it written as a document that clearly defines what is it a sell is somebody going to just come in and run the business for a period of time is you know am I going to get a down payment is there an insurance policy in place that will fund that down payment. These are all the conversation around continuity and I know the industry uses this grand succession term because it sells well. My challenge to you as you all walk out of here if you are a younger generational advisor and you're looking for a foot in the door this is your answer. Tell your G1 you want to buy the business but to start with I just want to be your continuity partner. I just want to be your solution that I know you don't have that if something happens to you I'm gonna be the person to step in and I'm willing to get an insurance policy and pay the premiums on my own to make that happen. I'm willing to take that risk. It's a dress rehearsal for long-term succession. You want to find a way into a business you want to buy yourself a business you want to get engaged in the market and M&A process in this industry this is probably the easiest way for a next generational advisor to do it. Especially if you have a pretty decent business yourself because you can financially support it. So again my challenge not just to the younger advisors but to everybody in this room if you don't have a document that says what happens to the business if you're not there please call us. It doesn't cost a lot of money to do and it's vital. It is your fiduciary responsibility quite honestly to your own clients because if you're not thinking about that yes they can go find another advisor they can call up their custodian and say you know my advisor passed away where should I go but is that really what you want to leave them with? Is that really meeting your fiduciary responsibility? So that's my big challenge to you and with that that is the market as it exists today from the perspective of the lens of a younger advisor with a mixed group. So I appreciate the time today I will open it up to Q&A. I think we've got a fair amount of time which I intended. Yes. Yeah so is there a discount? The technical answer to your question is yes. There's I'm sorry so the the question was when you're looking at a full sale of the business versus a partial buy-in where you are not a majority stakeholder is there a discount to value? And the short answer the technical answer is yes there is a discount. What is the right discount? That's a negotiable thing you'll hear people quote things like 15% 18 22 there's lots of numbers there's no right answer to that number. The number is situationally driven and it's also a negotiation between you and that next generational owner. Should there be a discount? Yeah they don't have control of the business they don't have decision making authority if I'm a 5% owner in a business should I be paying full value? Probably not. But if you're gonna finance it and you're not gonna make me put a down payment down and it's gonna come out of profit based notes and if profit doesn't happen I don't have to make my payment maybe the discount isn't all that relevant and that's that's a perspective younger generational advisors in the room that you should really be thinking about because this becomes a conversation this becomes a real sticking point in many deals is you are all financial to people right I've had a lot of CFA guys come into the room their next generational owners they're you know their first generational owner has built a 20 million dollar business and they're gonna buy a 5% stake well I'm not paying full value for that I want your salary discounted I want this discounted look at all these P&L items that you're spending money on that you shouldn't be I want lack of marketability lack of control discounts sure my choice is I could sell it for full value to that guy right over there or to Mercer or to Carson or to a PE firm now very few first generational advisors will actually do that because they love their clients and they don't look at those big firms and go that's where my clients would fit best but the reality is is that's the choice and you have to be sensitive to that as a generate next generational advisor coming into a scenario where you're giving getting a pretty good deal from a financial perspective so yes discounts are applicable within reason you had a question I put you up good question so the question was as you're doing a long-term succession plan are you setting value at today's revenue or projected revenues or future revenues because as a younger person in the room she's gonna add a lot of growth and why would I pay for the growth I'm bringing to the table right makes perfect sense what I'll tell you is typically the transaction is done at today's value each transaction at the time and again this comes to that whole trade-off of the financial scenario versus value as a practice right so technical answer yes you would want to not pay for the growth that you're providing to the firm because that's what you're adding but if they're financing you if they're doing it through growth and profit distributions if they're allowing you to tap into those profit distributions by not putting any cash down then maybe there has to be some conversation about what that looks like and that's income approach to value equity appraisals they're looking at what is the future trajectory of growth you're included in that your growth is included as discounting it back to present-day dollar and that's why you would choose that approach most frequently for buying equity yes sir Great question. So the question is, when a large aggregator buys a typical business in this industry, are they adding value to the scenario for the clients? I'm gonna tend to say the answer to the question is yes. And it's purely because they have expanded capabilities, right? A lot of these bigger larger firms have better investment management, they do tax, they do holistic wealth planning, they do estate planning, they do trust work, right? Is that always the case? No, depends on who your buyer is. And there is something to be said about your experience is unique, that you have created for your clients and they like that, that's why they're there. If they wanted a Mercer, they would have gone to Mercer. So I will tell you the trend for advisors like yourself is not to sell to the aggregators, even though they're beating on your door every day, even though they have a sales staff of 25 people that do nothing but send you emails and knock on your door and call you constantly. The vast majority of you are not selling to them at this point in time. Now, are they having success? Absolutely, they're having success. Yes, sir. So you're talking in a merger scenario? Another producer that has that has a book of business. So the question is, in a scenario where you have a business you have owners, you have another person that's coming into that business, they're coming in with an existing book of business clients that they work with, what happens to value as that person comes in? I'll broadly whitewash that as a merger. You could describe it many different ways. Yes, there's value has to be, it's a consideration, right? So how much discount that scenario requires is going to be unique to the scenario. Certainly, anytime you're buying one of these businesses or a portion of these businesses that is not a majority stakeholdership, there should be some thought to lack of liquidity, lack of marketability, and lack of control. And there are discounts. Again, it's going to range anywhere between 10 and 20 percent, typically, but it is unique to each scenario. And there are a lot of thought processes or things to think about as you enter into that scenario. Things like debt on the books. Okay, they have a book of business, but is there something in that book of business that is uniquely different from a growth trajectory perspective, right? Is that book of business coming in and it's a bunch of young clients that are high net worth and, you know, what does that make up? And is it entering a book of business on the other side or another business that's more stilted towards 70 year olds that are in retirement, that are in distribution phase? All of those things are going to be considerations that go into how that value exchange ends up happening. And that's why mergers, true mergers, where you're actually taking equity positions in a combined organization, are so rare in this industry. Everyone talks about it. The reality is most of those scenarios are sell and stays, where an older advisor is selling into a larger organization and is really monetizing their business, but is continuing on as an employee. Can be an employee owner, but generally a minority stakeholder. Yes sir. Yes, so the question is, what is the average length of time for a sell and stay? I would say it's generally between three and five years in length, with three years being the maximum for guaranteed employment. Yes sir. So the question was, for AUM advisors, how are we accounting for the fluctuation of revenue because of the market? And you're talking about in the valuation itself? So again, on an external transaction, you're generally doing a one-time transaction, so there is no real look at it. That's the risk the buyer is taking when they buy the practice, right? So the value is, what does this thing worth today? And I'm selling it to you, it's now yours. So there's very little thought of it from that perspective. Now if you did a discounted cash flow view of value, you are gonna look at it. What are the growth rates on this? And you are gonna discount that back to present day. But the reality is, there is a hundred other buyers out there that are willing to just strip a check. So you know, there's always that pressure in this market because there are so few sellers. As far as like a merger transaction or something, you know, like a sell and stay, the sell isn't really, you know, the value of that is fixed. Again, it's a singular transaction point. It's sort of a given. There's really not a discount for it per se. There obviously is a compensation structure and that's the difference between the two, like a typical sale and a sell and stay is, there's two components. You will see a lot of these large aggregation firms lump all that stuff together. And you'll start hearing these people talk about, oh I sold my business at a seven times revenue multiple or a five times revenue multiple. Sure they did. No, they sold it at three times revenue multiple and then they continued to work for the firm for five more years and get compensation and upside growth potential and additional compensation around that that brought them up to that four times multiple. But that really wasn't their multiple for their business. So again, not answering your question directly but that is something that, you know, might be spurring that question in general. But yeah, no, relative to value, value is a singular transactional point. We're saying this is what it would transact at. Generally not a discount looking out in the future unless you're doing that discounted cash flow approach. And then dirty little secret in the valuation world, discount rates. Discount rates affect value really strongly. And guess how they figure out the discount rate? They use something called the build-up method. And the build-up method just says here's the risk-free rate, here's a risk premium for being a financial advisor, here's a risk premium because this business looks like this, here's this other risk premium. Is that scientific? No. It's the art in the science. Is there logic behind it? Sure. But somebody is arbitrarily saying this is riskier than this is, you know. It is a valuation appraiser's opinion. No different than having your house appraised. Yes sir? Yeah, so the general idea behind a profit space note is you're only going to pay what you're capable of paying based on the profit distribution. So it is geared around as profit distributions happen, the payments are adjusted as those profits flow. So if there is a year where profits don't flow, it's not like you're going default on the note, right? That gets pushed either to the end as a balloon payment or adjusted across the remainders and it's just dependent upon how the note is constructed. Thank you all, I appreciate it.

financial advisory firms

succession planning

internal succession

buying into the business

tranches of sales

written succession plan

continuity planning

value drivers

income approach to valuation

large aggregators