Broker Check

2023 Succession Recap

Malcolm Thomas | January 10, 2024 


Mergers and acquisitions continue to grab the headlines in the wealth management industry, and 2023 was no exception. However, most financial advisors building businesses are not on the radar of large aggregators or private equity, and yet they are building valuable businesses that service hundreds of clients.  This is exactly why we started SellMyFinancialPractice: to help the individual advisors who have built a successful small business and want to monetize those businesses while ensuring their clients and the families they have served for years would be adequately cared for.  In 2023, we completed 12 succession plans with an average of $262k in annual revenue, ranging from $20k to $1.1 million in annual revenue. 

  1. First, we generally see three different ways of structuring the payments for the business: Fixed Payments- these can be guaranteed down payments or a fixed payment contingent on the business's performance.

  2. Promissory Note- A written promise to pay a specific amount, including interest, over time. This can be fixed or adjustable.

  3. Revenue Share- a revenue split between the buyer and seller on revenue generated from the business.

In most deals, we work with the buyer and seller; it combines three types of payments, with a portion allocated as 1099 income (transition consulting) and a portion as Capital Gains (Goodwill).

While each succession deal was unique and structured around what made sense for the seller, buyer, and their clients, some trends are worth noting for buyers and sellers moving forward. 

  1. Recurring revenue drives higher multiples and more guaranteed and upfront money.  It is no secret that advisors who build their business with recurring revenue, whether advisory revenue or taking trail compensation on broker-dealer business, can receive a higher valuation on their businesses than advisors whose revenue is primarily transaction/commission.  Reviewing the 2023 deals has translated into the seller receiving 30-50%   of their total valuation upfront guaranteed, and in many cases, 100% of the valuation based on the recurring revenue guaranteed within the first two years.  The buyers are willing to pay this amount upfront and guaranteed because the businesses with recurring revenue have proven to provide consistent and predictable cash flow.  These deals may have a contingency built in after 12 months based on revenue; however, even with unpredictable market conditions over the past few years, it is very rare to see the revenue vary more than 10% up or down annually.

  2. Sellers are open to a % of revenue over extended periods.  A few years ago, sellers were resistant to including a revenue split as the primary source of funding a succession plan, as it was viewed as entirely seller-financed.  However, this may be the only way for advisors with primarily transactional businesses to receive the value commensurate with their expectations.  7 of the 12 deals we completed in 2023 included a revenue share, and in 5 of those, it was the primary funding source of the succession plan.  Sellers are starting to see the value in structuring their succession plan this way as it allows them to continue to share in revenue for multiple years while significantly if not completely, eliminating their expenses.  Additionally, the sellers are starting to see the upside potential and the ability to participate in the growth of the business as the buyer engages with the clients and identifies additional revenue sources.  One final note: Most sellers think they need to remain fully licensed to enter into this type of deal; however, that is not the case.  There are circumstances with a written legal succession agreement; the buyer can pay the seller a % of revenue generated from the existing clients for a pre-defined number of years.

  3. No business is too small to sell.  8 of the 12 succession plans we completed in 2023 had under 100k in annual revenue.  It often started with the seller saying, “There probably aren’t many people interested in buying my business.”  It is the exact opposite.  NextGen Advisors looking to grow are lining up for these businesses because it provides existing revenue without taking on additional expenses, outside of acquisition costs, and access to clients with significant growth opportunities.  As a seller, it allows you to monetize the business, but most importantly, ensure your clients and their families that you have served for years receive the service and help they need for the next generation. There was also a consistent theme with these sellers related their motivations in selling now.  It seems these advisors are contemplating selling their practice because they are facing challenges related to rapidly rising affiliation fees, including cybersecurity costs, as well as increasing education and client suitability requirements. When advisors looked at what they could save in overhead coupled with increased regulatory scrutiny, it is prompted them to consider selling their business.

As we look ahead to 2024, several factors will likely affect the succession planning market for individual advisors.  How will interest rates affect buyers' access to capital?  What effect will the proposed updated DOL rule have on advisors Independent Contractor status?  Do technology and client meeting preferences make location less of a factor vs. expertise in finding a successor?  While all of these will be factors to watch, the most significant consideration that continues to cast a shadow over the financial advisor space is the aging advisor population and the lack of documented continuity or succession plans.  If you don’t have a documented plan, don’t wait until it is too late to put a plan in place.  Every advisor needs a continuity plan, and if you think you will retire in the next five years, it is time to start putting your succession plan in place.  By planning now, you can find the right successor, maximize your business value, and ensure your clients are cared for.  At SellMyFinancialPractice, we have a very straightforward process explicitly designed for the individual advisor without a plan, don’t hesitate to reach out if you want to learn more.