Growing AUM with an Investment Banking Partner

Aug 17

The 2 fastest ways to grow a Wealth Advisory ﬁrm are 1) Acquire other Advisory practices, or 2) Have an Investment Banking partner. Below is on the latter.

Working with Business Owners

As a Wealth Advisor, do you work with Business Owners, and how many? The ﬁrst thought was probably, yes. What about the second part? Were you able to think of the exact number, have a range say 5 to 7, or thought to yourself... "I don't know"?

No matter the answer, these clients are the most valuable to your ﬁrm, and turning their business into their legacy is a way that a Wealth Advisor can turn these clients into clients for life while also growing the ﬁrm.

Lower Middle Market Businesses

There are 350,000 companies in the U.S. that generate between $5M and $100M in revenue*. So, whether they have large investment accounts or not, if they are successful, their business could be worth millions and eventually they will retire or transition the business.

We generally don’t like to throw out valuation multiples, because every business and industry is diﬀerent. However, to put it into perspectice, let’s say those businesses previously mentioned generate between $1M and $25M in EBITDA, and assign a valuation multiplier of 4x.

This means (if this was the correct multiple) that working with just 1 of these businesses the Advisor is working with a client that is worth between $4M and $100M.

Assets Under Management vs Advisement

The following information is from an article on Michael Kitces’ website**:

“... the SEC states in its directions for Form ADV Part 1 that regulatory AUM should only include securities portfolios for which the advisor provides continuous and regular supervisory or management services...
For advisors who want to report some number representing the total scope of their advice – including the amount of assets that don’t count as regulatory AUM – it is permissible to report on Assets Under Advisement (AUA) in the advisor’s marketing and in Part 2 of Form ADV, as long as the advisor can document and substantiate the calculation process.
AUA might simply include the total net worth of all clients for which the ﬁnancial advisor does ﬁnancial planning or otherwise provides advice.”

Why even Mention AUM and AUA?

It's a way to demonstrate that an Advisory ﬁrm could be viewed as substantially larger than the AUM number, and it can be a good gauge of potential growth of the ﬁrm. It’s just a matter of capturing those assets.

Advisors also have goals of where they see the ﬁrm in 5, 10… years from now, and AUA is a way to visualize where the ﬁrm is and could be.

So, if you’re advising Business Owner clients should you include the value of the businesses in AUA? Probably best to be safe and not outwardly state this, but no reason why you shouldn’t have a good grasp on the possible value of the businesses and owners you’re working with and have this number in the back of your mind at the very least.

*https://www.kitces.com/blog/calculating-regulatory-assets-under-management-vs-advisement-aua/

The Wealth Advisor as a Trusted Resource

The wealth advisor is the most trusted resource (or should be) for business owners. Now, what happens when these business owners are contemplating selling or exiting their business partially or completely? The wealth advisor could quickly refer a CPA or Attorney for tax or legal advice. However, when there is a liquidity event, millions are at stake, and having a trusted partner is crucial. Where do they turn when this happens?

This is where demonstrating to the Business Owner client that the Advisor has the capabilities and team in place to handle such transactions, with the primary resource being a trusted Investment Banking partner.

Worst case scenario

If you ask a Business Owner who they’d call ﬁrst if they wanted to sell their business, you'll commonly hear “I’d call my CPA or Attorney”.

However, again, shouldn't it be their Wealth Advisor? They are the ones that touch every other ﬁnancial aspect of these clients lives. The CPA and Attorney are essential, but the Wealth Advisor should be the quarterback of the relationship.

Example – A Wealth Advisor has a client running a successful business in which a Private Equity ﬁrm takes notice and sees the value and potential. So they solicit an oﬀer to buy which is accepted because it was the right timing at seemingly the right price.

Now imagine, post transaction, that someone else is managing the proceeds from the transaction and not the original Wealth Advisor.

What happened? Most often it is because the Advisor never established the narrative that they and their team are the “go-to”. If the Advisor proactively discusses Business Succession planning and has a trusted Investment Banking partner, they will know options available beforehand instead of taking the ﬁrst oﬀer. Furthermore, Private Equity doesn’t make money by overpaying, and running a competitve process to ﬁnd the right partner at the right price is what a good Investment Bank will do. If it’s a competition of 1, the buyer stands a better chance!

A Simple Conversation gets the ball rolling

Asking questions about the business you’ll obviously ﬁnd out a lot, but more imporantly a narrative gets established. There are a number of questions to ask, but simple ones to start with are:

“How often is the owner contacted to sell? (If they are a successful business, this happens a lot – sometimes it’s even other Wealth Advisors!)

If the Wealth Advisor wasn't aware of the answer, it can be eye opening!

Second, "When do they want to retire/exit?”

To the second question, if they provide a number – “I want to retire/exit/sell 5 years from now”, when is the best time to start exploring options...? Now.

The reason being, when an Investment Bank takes a business to market, they are going to Private Equity, Single Family oﬃces, Strategic Buyers…, and none of them say “here is your check, where are the keys?”. A lot of times, they want that owner to stay on 3 to 5 years. So, starting 5 years from now pushes back their retirement to 8 to 10 years.

Options for Business Owner clients

Options are key, and one area that diﬀerentiates an Investment Bank from other ﬁrms, such as business brokers.

One such example, is a "second bite at the apple". Meaning, maybe the Business Owner doesn't want to exit entirely right now, but they would like to bring on a strategic partner. It could be a partner with a speciﬁc skill set, or track record in the same industry, or even a ﬁrm that is just willing to provide capital. Either way, say a strategic partner is willing to buy 40% of the ﬁrm today, and the remaining 60% at year 3, 5… whenever. With the right partner, what if the ﬁrm grew substantially over that time and the remaining 60% is worth more in the future than 100% today! That is the second bite.

Furthermore, they took some chips oﬀ the table, realized some of their hard earned value, and protected themselves from the worst case scenario of the business failing for various reasons and not capturing any value at all.

In Conclusion

The Wealth Advisor, CPA, Attorney, and a Trusted Investment Banking partner are crucial to Business Owners. With the former, the Wealth Advisor, being the driver and center of the relationship.

Often times, it is the latter, the Investment Bank that is overlooked, but it is the one that can do what the others can't - establish a competitive process to get the highest value from the right partner in a transaction, and more importantly provide options.

Vesticor Advisors provides services for lower-middle-market business owner liquidity events. This is a commitment to turning the Business Owner's life work into their legacy. It can be priceless and can ensure that they are a client for life.

Furthermore, preparing in advance for this event will signiﬁcantly increase the value that is transferred to the business owner, ultimately resulting in the post-transaction need for wealth management, investment, tax, estate, and insurance planning.

Vesticor allows the Business Owner client to gain an objective assessment of their full range of options - from taking the business to market, raising growth capital, recapitalizing debt… It also ensures that the Wealth Advisor has another advocate on the team to enhance the relationship.

*www.chiefexecutive.net, “Why M&A Investors are Moving to the Lower Middle-Market

**https://www.kitces.com/blog/calculating-regulatory-assets-under-management-vs-advisement-aua/

Brian Meidlinger