Positioning Your Firm for a Sale

Whether you plan to sell in six months or sixteen years, having clarity on your business and your goals are critical to positioning your firm for a future sale.  This critical thinking process can also create the path to refining some of the key components of your business strategy outlined below, which will contribute to an increased value of your organization.

Know Thyself.  If you have decided to sell your firm within the next few months, there really isn’t much time to enhance your business.  You can, however, improve your chances of achieving your transition aspirations by gaining clarity around your business, your goals and your ideal buyer.  Take the time to methodically think through the goals of the business, your own personal goals, as well as what you seek from the pending transaction.  Then you are best positioned to identify that future partner that is the best fit and craft a deal that is most suited to your needs.

You also need to develop the story around your organization.  Creating the story that connects your company’s mission, its history, and the future with the acquiring entity together will help refine the ideal acquirer profile and sell them on the value of your firm.

On the most tactical level, crafting a clean set of financial data and other important information about your company will help create a streamlined process and a path to finding the best fit for your firm.

A Lean, Clean, Growth Machine.  If you have a longer time frame, then you should spend your energy focused on the following areas:

–       Lean = Creating a cash flow-rich, well managed company

–       Clean = Managing a low risk organization

–       Growth Machine = Creating a firm that has not only demonstrated growth and growth prospects, but has a methodology for sustained growth

Cash (Flow) is King.  The cash flow of your company is ultimately what pays back the investor (the buyer) on the investment.  Simply put: The higher your cash flow, the higher your valuation.

The margin of your business, cash flow’s close cousin, is the best metric of how efficiently your company is run.  If a company is being run in such a way as to require two more employees than its peer group, the owner(s) can expect to have a $500,000 to $1,000,000 discount applied to the valuation.  Not only has cash flow been compressed, but a signal has been sent to the buyer that this may not be a well-managed organization.  Using benchmarking studies to determine your firm’s efficiency can help you determine if there are opportunities for improvement.  Because human capital accounts for ~75% for a firm’s expenses, the non-urgent re-structuring the organization prior to a sale can pay significant dividends.

A Stitch in Time, Saves Nine.  Clean ADV’s and operational effectiveness are the very first step of mitigating risks associated with your firm.  Think through any potential risks within your company, which can range from having non-compete’s / non-solicits in place, ensuring that your company’s revenues are not heavily dependent on a few key clients or an aging client base, or that clients will not make the transition to the acquiring firm.  Address any potential risks to increase the pool of potential buyers and optimize the value of the firm.

Grow Up (and Up).  Growth is a critical driver of valuation: a 2% incremental growth rate can increase firm value by nearly 10%.  Your ability to not only deliver growth, but to have a story about why the growth happened and is sustainable will help drive the attractiveness of your firm.  At DeVoe & Company we have literally hundreds of cells in our discounted cash flow model that influence the valuation calculation: There is no cell for ‘charisma’.  If your company is growing exclusively because of your independent ability to connect with prospects, you can expect that the company will trade at the low end of the valuation range.

We are currently working with a $2B AUM client who acknowledges that the company growth has come from the way he connects with people.  He is now allocating his time to coaching the next generation on people skills and teaching them how to ‘do what he does’.  He’s creating the growth story and the growth machine that can sustain his eventual exit.

Ultimately, methodical planning and thinking is key to a successful transition.  Regardless of your time frame, invest the time now to create a plan that will optimize results in the future.


 Guest Author:

David DeVoe is the founder and managing partner of DeVoe & Company.  Previously he served as Managing Director of Strategic Business Development at Charles Schwab Advisor Services.  In this role, he developed and led Schwab’s Transition Planning platform, which provides comprehensive M&A and succession planning services to registered investment advisors.  During this eight-year period, he provided strategic counsel to over 300 advisors.

 As part of this role, David also oversaw the Strategic Business Development sales team, which manages relationships with Schwab’s large, complex clients. The group’s segments included large national clients, consolidators, independent broker-dealers and TAMPs, custodying over $130B in assets at Schwab.   Previously, David was Director of Practice Management Programs at Schwab Advisor Services. He was responsible for developing and managing a suite of programs to help advisors with business-critical issues, including transition planning, compliance and human capital. Prior to this role, he led product strategy for Schwab Private Client, the company’s high net worth group focused on clients with $1 million or more in investible assets.  Before joining Schwab, David worked in the Strategy and Business Development Group at American Express, where he focused on business strategy and evaluating acquisition opportunities. Early in his career, he founded and managed several small businesses.  David holds a BA degree from the University of California, Berkeley, and an MBA from Cornell University Johnson Graduate School of Management.

Website: www.devoeandcompany.com

Twitter: @DavidDeVoe1 

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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