How Ken Fisher Ruined Your Succession Plan

By now most of you probably read or heard that Ken Fisher recently sold a 20% stake in his eponymous RIA – Fisher Investments reportedly, for just under $3 Billion.  If you can believe the estimates, the sale would equate to about a 20x multiple which I have to think bodes poorly for the average independent RIA.  In other words, the traditional succession plan for many RIAs is about to blow up. 

Pre-Fisher

First, let’s start with what one could consider the traditional advisory firm succession plan.  Many independent RIAs and advisors (G1s) have built what most would agree would be a successful business.  While still funneling some personal expenses though, firms still keep overhead down and have a nice base of steady, recurring fee income resulting in strong margins.  The small staff is technically proficient, skilled, and client-focused.  Many firms have clearly identified a successor (or G2) who has grown in the business by starting in either an admin, jr. planner, or investment-focused role. 

The G1 will someday look to cash out or equalize his or her business by transitioning to the G2 in the form of some cash upfront and deferred payments (usually coming from the book of business the G1 built).  The challenge today, however, comes in multiple areas.

• The Valuation:  When I first started in the business, we discussed 2 – 2.5 times trailing 12-month revenues as a starting point.  Today you are digging deeper and taking about 7 – 12x of a discounted EBITDA.  While the G1 may feel generous and want to set up the G2 for the best possible success, he/she still wants to maximize the return on their life’s work so pricing is harder.
• The G2 Team: When multiples were lower and less complex, it would not be uncommon for a single G2 to take over a successful business.  Today’s challenge is that many firms must plan two or three G2s to buy out a single G1. 
• The Downpayment: A double whammy of many lenders not really understanding the RIA business AND higher interest rates on business loans. Many G2s (even G2 teams) simply cannot afford the downpayment

Post-Fisher

So how did Fisher’s business command such a huge multiple?  My guess is for several reasons, especially its strong track record of growth, its national brand, and a large and loyal mixture of HNW and institutional clients    Fisher has a significant scale and as one of the largest independent RIAs is poised for future growth.  Of course, it is going to command a bigger number but what does it do to your succession plan? 

I think the post-Fisher agreements will make pricing more difficult.  Obviously, most G1s won’t expect a full 20x, but their expectations of what firms are worth will increase to the higher end of the normal valuations.  I would also expect many more G2s to question the growth potential of their acquisition.  What is it, exactly that I am buying and where is the potential return?  Lastly, I would also expect banks and other lenders to look at the Fisher model of growth and scale in determining their risk in funding a smaller, low-growth/low-scale business.  In a nutshell, it just got harder to sell the business to the staff.

The path forward

Knowing this, and planning for the future (as all good planners do), the following options should be considered:

• Understand your number:  Smaller firms run “notoriously cheap.” Any astute buyer (or consultant hired to help) is going discount your net revenue to cover where you have underspent i.e., marketing, upgrading technology additional personnel, etc. Plan on a discount to what you think the business is worth – be realistic
• Have a backup plan:  If your plan is relying on a single G2 to buy you out, think again.  It is quite possible that he/she doesn’t want your business, can’t afford your business, or will not pay the amount you think it is worth.  They may not be able to obtain the financing that is needed.  Understand that it may take two or three G2s as well as 7 – 10 years to get them fully ready for buying you out.
• Consider a third-party sale instead:  There are plenty of firms that are looking to partner with established firms that are looking for an exit strategy or to help equitize a business.  Think of larger firms that support your business today and can provide scale in marketing, compliance, planning, and technology investments.  Tip: pay attention to their more recent acquisitions – too many are just paying top dollar without looking at what it does to the greater culture or brand.

A commitment to growth, a focus on scale and technology, a brand in the market with loyal and diverse clients – if this is you, congratulations on setting yourself up with the main ingredients for a successful and profitable succession plan.  If not, look out for discounts and disappointment.  The benchmark has been set. 

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