News, Vision & Voice for the Advisory Community
The leveraged buyout specialist posits thousands of principals trapped in their practices, unable to sell, victims of psychological unpreparedness
May 14, 2015 — 4:57 PM UTC by Lisa Shidler
Brooke’s Note: A cynic might observe that Mark Hurley’s latest dispatch blames the victim — i.e. the seller — for a badly performing RIA M&A market. I am not so cynical. Hurley, whose firm provides funding for internal transitions, acquisitions and MBOs, has perfected the art of using hyperbole to make a point. There is plenty of exaggeration here, not to mention the tossing about of terms best employed within the confines of a psychologist-analysand relationship. But Hurley’s fresh and vivid prose compensates, so to speak, for the editorial license he affords himself. Still, the Hurley solution is not offered with much bedside manner or with advice about how to overcome the psychological hurdles he describes in his 58-page diagnosis. Perhaps he’s saving that for the sequel.
Emotional. Peevish. Delusional. Irrational.
Those are some of the milder characterizations of traumatized RIA executives in the midst of selling their businesses in Mark Hurley’s page-turning dispatch from the M&A front lines, “Understanding, Managing and Capitalizing on the Psychology of Buying or Selling a Wealth Manager.”
In his 58-page analysis of what goes wrong in advisor deal-making, Hurley highlights the emotional dysfunction that makes deals fall apart and offers ways to smooth out such transactions. See: Favorite succession plan of RIAs remains the same: none at all.
But in doing so the head of Dallas-based Fiduciary Network LLC, along with Benjamin Robins, Yvonne Kanner and Steven Cortez, uncover a deeper pathology plaguing financial advisors who fail to create boundaries between their souls and their businesses: The sale of their practice becomes tantamount to the prospect of dying, complete with the trauma surrounding an execution date circled in red on the calendar.
The reality, needless to say, is hardly so grim.
“You’re not going to be dead when you sell your business but you are on the next phase of your life,” Hurley says. “I assure if you don’t plan ahead, when you sell your business you will freak out. That’s why we see these weird behaviors and guys freaking out over small things. It’s idiocy and people need to calm down and take a Valium.” See: What I learned from four failed attempts to find a successor for my $1.5-billion AUA RIA.
The suggestion that the RIA business is rife with under-dosed advisors is over the top, according to David Selig, chief executive of Advice Dynamics Partners LLP.
“The premise that all owners of wealth managers may be very good at wealth advisory but are terrible business people is a gross mischaracterization of the entire industry,” he says. (Hurley acknowledges Selig as a contributor to the thinking that went in to the paper.)
But Selig acknowledges that Hurley’s paper is …. a Hurley paper. See: What to make of Mark Hurley’s latest prophecy that most RIA firms will go out with a whimper.
“What makes his papers a great read is they are controversial but there’s always a grain of truth in them too. If you’re a seller and you’re reading his stuff about sellers, you will grudgingly acknowledge some of it is true. But if you’re a seller and you read his description of buyer behavior, you’ll be nodding your head up and down. Same goes for a buyer. The buyer will be nodding his head vigorously when he reads about sellers.”
Hot; should be hotter
That adds up to a whole lot of bobbing heads in the industry these days given that the RIA M&A market has never been hotter, according to David DeVoe, chief executive of DeVoe & Co., an RIA M&A firm in San Francisco.
“2014 was a record year with significant uptick,” he says.
DeVoe tracked 34 deals totaling more than $90 billion in assets in the first three months of 2015. In all of 2014, he tallied 90 deals totaling $63.1 billion in assets. DeVoe tracks any deal with $100 million in assets or more, following a career at Schwab Advisor Services where he headed up the firm’s RIA M&A tracking efforts. See: Schwab 2013 RIA M&A data show hope but also futility.
Still, those stats are not so hot considering the number of players on the field, he says.
“With more than 10,000 advisory firms and less than 100 deals a year, it just seems like that’s not nearly enough deals taking place.”
By DeVoe’s reckoning, 300 deals a year need to happen just to keep up with the number of advisors who, demographically speaking, should be looking at retirement. See: My trip to Omaha with 40,000 of the Buffett faithful and what questions the Oracle didn’t answer.
Hurley’s latest paper marks both a turnabout and an evolution from the conclusions he reached in prior efforts. His most famous paper, published under the Undiscovered Managers brand, predicted an M&A spree among RIAs that would result in 10,000 businesses being consolidated to about 50 mega-firms. See: Bob Veres’ level-headed response to Mark Hurley on valuation.
His next study reached the very different conclusion that only a handful of firms were run professionally enough to have what the paper called “enterprise value,” thus putting anything more than a fire sale of managed assets out of reach to most advisors. See: What to make of Mark Hurley’s latest prophecy that most RIA firms will go out with a whimper.
In 2013, Hurley published a report called Brave New World of Wealth Management that suggested that the RIA business will be concentrated — but not consolidated — into an industry over the next decade. See: Mark Hurley drops a new wealth management prognosis on the industry with a zero-sum flavor.
This latest study seems to go the final mile in diagnosing the chronic blockage of the RIA M&A market by looking not at the businesses themselves but at the (apparently highly neurotic) people who run them.
Leggo my Mr. Coffee
Hurley relates numerous examples of deeply conflicted sellers unconsciously acting out their ambivalence.
“We had this guy we were going to give $10 million to and he was upset about a coffee pot. He was selling his firm and demanded he keep his coffee pot. This has to do with a sense of loss of control because my life is ending in one way and I don’t want this to happen.”
Other examples of self-sabotage include a seller adding a hedge fund to his firm in the middle of negotiations, an RIA’s 11th-hour demand that his wife be put on the buyer’s payroll and a seller demanding the right to make acquisitions of other firms after he had sold his business to the buyer.
RIAs are particularly prone to psychological unpreparedness because most buyers and sellers are accidental entrepreneurs. Of the 10,000-plus wealth managers in the United States, many are analytical types who never sought to start, much less manage, a business. But with the endgame in sight, sellers find they are emotionally unequipped to give up the practice they worked so long and hard to build. Buyers, of course, have their own set of worries with a chunk of money changing hands and so much riding on the success of the deal. See: Two accounting firms abandon merger talks leaving giant Schwab RIA surprised and crestfallen.
With such raw emotions in play, Hurley allows that many prospective buyers and sellers should call to a business coach before seeking the more quantitative services of an M&A expert.
“These coaches really help sort you through what you want to do and what your next life experience should be. An advisor helps clients to de-emotionalize money. A financial advisor needs to think carefully through the next transition,” he says. See: Have an aversion to succession plans? Consider a continuity pact as a vital baby step.
But inevitably, emotions are in play when selling a business, as Hurley and his colleagues have discovered firsthand.
“We’d show up and the seller hated our guts. What you’re seeing is a grieving process that has nothing to do with you. The person is facing their own maturity and ending a phase of life they really don’t want to end,” he said in an interview. “You add all of these factors together and the sellers have a sense of anguish. You see all of the stages of grief. You see denial, negotiating and anger.”
Hurley’s Fiduciary Network LLC has made 17 investments in wealth management that have combined assets of $22 billion, but he maintains numerous deals that should have been finalized fell apart because buyers and sellers weren’t emotionally ready. See: After more than two years of radio silence, Mark Hurley pings with a stake-taking in an under-the-radar RIA.
Buyers are not exempt from neuroses when it comes to the psychology of the deal.
“Buyers have their own issues and they’ve got to be comfortable with someone. If I work with someone and they are doing their first deal, it’s very stressful but the second time it’s almost like dealing with a different organization,” says Hurley. “For a buyer, an increasingly material deal will increase your value by 50% and then you need outside capital.”
He adds: “The buyers are still looking for a reason to do the deal. Part of it is buyers don’t know what they’re doing. They’re scared out of their minds of doing something stupid. You see weird behavior come out. The guys don’t quite know what they’re doing and it unleashes a lot of fears from buyers. We call it 'buyer schizo.’” See: Which type of AUM is worth more to a buyer?.
Münchausen by proxy?
Hurley prescribes that buyers analyze the balance of power of the company of interest to understand who has majority ownership and voting power.
“Unfortunately, at the front end of a transaction process prospective acquirers are provided only limited information and are not yet able to meet with any of the seller’s successors. Thus it can be difficult to precisely determine the balance of power between the firm’s constituents.” See: How an RIA-only serial buyer-hirer sprinted to $2 billion of AUM with pieces from U.S. Trust, Fidelity, Genspring and Wachovia.
The buyer needs to obtain key compensation stats and background on employees to understand the seller’s compensation plan. Just as important, the buyer must evaluate whether the owner is emotionally capable of selling. One red flag: Have the owners previously tried to sell the business but failed? If that’s happened before, it may be a key sign the owners aren’t yet ready to let go, Hurley cautions.
He points out a particular permutation of this scenario:
“We have found there are a handful of owners who are incapable of selling their business but at the same time passionately enjoy the attention they receive from the sales process. They love being wooed by prospective buyers and consequently want the process to go on as long as possible. They also seem to derive some perverse pleasure seeing prospective acquirers — organizations which are far more successful than their own — be forced to go through an internal fire drill to respond their demands.”
What I mean to say…
Even when sellers are serious about the deal, buyers need to keep them on track as it’s normal for owners to procrastinate on certain transaction-related milestones.
Hurley puts it more bluntly: “From the outside looking in, the selling owners at times can appear to be certifiably insane.”
Said insanity, or at least such passive-aggressive behavior, may manifest itself in different ways.
“Documents that were promised at the beginning of the week often show up late on a Friday afternoon. More than a few [unsophisticated and selfish] selling owners have taken (allegedly, long-planned) vacations in the middle of the sales process,” Hurley writes in the paper. “The really smart buyers have a process when the deal comes. They decide if they want to pursue it and they’re disciplined. They’ll be enthusiastic and supportive even if the sellers are insane. The smart buyers stay focused on the big picture.”
But buyers’ messages can be similarly murky. As a service, Hurley provides a few buyer-to-English translations in his report.
When a potential acquirer says, “Getting the money is no problem,” they really mean, “We don’t have and probably won’t be able to get the cash to buy your firm.”
When the buyer says, “Your projections for future growth are interesting,” they really mean, “Are you out of your mind?”
Download the report here
Mentioned in this article:
Advice Dynamics Partners
Top Executive: David Selig
DeVoe & Company
Mergers and Acquisition Firm
Top Executive: David DeVoe
Advisor Growth Strategies, LLC
Top Executive: John Furey
Share your thoughts and opinions with the author or other readers.