HomePW OnlineExpert ViewsSelling Advisors Need To Do More Due Diligence In Partial-Equity Deals 

Selling Advisors Need To Do More Due Diligence In Partial-Equity Deals 

Financial advisors are analytical by nature. They spend much of their time researching investment solutions, studying individual securities, and pouring over economic indicators to ensure they are making well-informed recommendations and decisions regarding their clients’ financial wellbeing. While they are doing what’s right for their clients, many advisors do not conduct the same level of due diligence when selling all or a portion of their business for both cash and the enticement of partial equity. 

Historically high multiples, combined with the impending wave of older advisors’ retirements, create a frenetic urgency to sell businesses before the private equity party ends. Sometimes the allure of a deal that includes or even requires that the seller take partial equity can lead to hasty decisions and deals that ignore advisors’ better judgments. An approach they would never take with their clients’ financial future has become the norm when considering their own future.  

Fast Deals Can Lead To Poor Decisions 
Many elite advisors would approach an investment touting an eye-popping 500% to 1,500% return with a heavy dose of skepticism. Most would conduct extensive due diligence and leverage third party research. However, when taking equity in the acquiring company as compensation for a minority or majority piece of their practice, advisors may conduct little due diligence on the business model of the acquiring firm to verify the likelihood that their stock appreciates as promised. 

There is nothing wrong with advisors who have worked a lifetime building a practice to decide to take some chips on the table in the types of cash/ equity ownership deals being offered today. But advisors can’t take the recruiter’s or executive’s word for a company’s valuation and prospects. The advisor needs to do their own analysis of the strength of that company and its ability to execute its strategic long-term plan (if they even have one). 

As deals become more complex, financial due diligence becomes more critical. Depending on the offer, advisors need to know what the acquiring company’s stock is worth today, the profit-sharing agreements, when and how they can execute their shares, the sales price of comparable firms and the likelihood of success.  

While financial considerations are always important, they can’t be the only driving factor. The fear of missing the M&A boom may cause some advisors to focus on the multiples and the promise of exponential returns on equity being offered and less on the impact any deal will have on their clients, staff and practice. 

Financials Are Important, But So Is Cultural Fit 
Deals involving partial equity arrangement mean buyers and sellers will be working together for some time. Having a new business partner for five to 10 years means you really need to know the partner taking over part of the practice. It’s a risky gambit to jump into an affiliation model primarily on the unverified expectation of return on equity, instead of client and practice fit. 

Not investigating corporate culture may result in aligning with a firm that doesn’t offer the right services, products, platforms or technology stack to best support your clients. More bluntly, it might mean you’ll be stuck with someone you don’t like. Finding this out ahead of time will make your life easier and result in better services for your clients.  

Succession and M&A conversations need to concentrate more on the level of service that will be provided to clients and what is best for the practice.  

To ensure a deal is successful for all involved, research should not end with monetary considerations. The seller is responsible for learning how the buyer will help provide services to clients, what support the practice will receive and if the two firms are a good cultural fit. 

There Is Plenty Of Selling Going On But Not Enough Education 
Advisors looking to monetize their most valuable asset still have several options and can be discerning about what is best for their clients and their team — without sacrificing the bottom line. Additional diligence provides advisors with enough information to find the right partners and ensure the best possible outcome.  

Neil Turner is co-founder and co-CEO of NewEdge Advisors, a leading RIA and broker-dealer headquartered in New Orleans. 


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