Who Should You Sell Your Practice To?

When selling a practice, financial advisors have more options than ever before. Advisors can sell in different stages, or all at once, and have an array of qualified buyers to choose from. One question advisors looking to sell should ask themselves is, should you sell to an aggregator or a small firm? There are pros and cons to each option, which we break down below.

Selling to an Aggregator

Several large firms have emerged over the past decade and are quickly acquiring practices at record speed. As they acquire, they are consolidating sections of the industry into a few large providers. As one would expect, their size and quality present a seller with several positives and potential negatives.

Pros of Selling to an Aggregator

As a large enterprise, an aggregator can bring to bear a wide variety of resources and experience. Namely, they can offer a seller:

More resources and specialists:

As a larger firm that have a robust staff, which often includes specialists in key areas such as college planning, saving for children with special needs, and divorce planning. They also have a great deal of resources in terms of support staff, technology, and other valuable tools that make a practice more efficient and appealing to clients.

More advisors to accommodate specific client fit:

Rather than specializing as a firm, an aggregator has several advisors within its ranks that can cater to a specific niche. This allows a practice to serve the needs of specific client groups without sacrificing broad appeal and market share.

Experienced in acquiring practices:

Aggregators often have a dedicated team of M&A specialists who manage the entire process from start to finish. This ensures a smoother transition for clients and staff and a better experience for the selling advisor.

Better capitalized:

As a larger firm, aggregators have greater access to capital, which enables them to make larger purchases than small and mid-size firms. They also have greater capital for other investments, such as marketing and technology, which help fuel growth and practice efficiency.

Cover a larger geographical region:

Most aggregators can serve a larger geographical region and/or multiple regions. This allows advisors to serve clients in multiple areas, as well as stay relevant to clients if they move or have homes and offices in multiple locations.

Cons of Selling to an Aggregator

Of course, bigger isn’t always better. With size comes certain challenges, including:

Specific servicing advisor difficult to identify:

A single advisor can become lost among the sea of faces, especially if they take a team approach to client service. This can make it difficult to build a strong, personal client relationship.

Not focused on one practice or location:

Because most aggregators serve multiple offices and locations, they split their attention and resources among multiple teams. This can make it difficult to secure leadership attention and time/resources needed to run the practice.

Many junior advisors trained on client base:

The larger firms need constantly train new advisors to create the appropriate bench of advisors for future growth.  Many sellers don’t like the idea of their clients being serviced by “advisors in training” or “junior” advisors.

Clients not serviced by founders:

The founders in a large aggregator serve a wholly leadership function. They are removed from the day-to-day operations, including removed from client interactions. This can lead to a disconnect between the client and the brand, as well as the leaders, and what is happening in the practice.

Pursuing multiple opportunities at once:

Because most aggregators focus on rapid inorganic growth, they often split their attention among multiple opportunities at once. As a seller, you may not receive as much personal attention as you would with a smaller practice who is more selective about their acquisitions.

Not local to the practice being sold:

Most sellers like to sell to an advisor in their region. However, most aggregators use acquisitions to gain a foothold in a specific market. So, they are not currently local to the market or as involved in the community as an advisor who lives and works in your area.

Selling to a Smaller Firm

Before we dive deep into the pros and cons of this option, we want to stress that the term “small firm” is relative. Compared to a multi-billion-dollar aggregator, we can consider many sizeable firms a “small firm.” Still, no matter their size, smaller firms bring their own set of pros and cons to the table.

The Pros of Selling to a Small Firm

Often local or regional to the seller:

Generally, smaller firms look to increase their market share in a specific city or region. As such, they are often local and already established in the same community as the selling advisor. They also tend to live in the area, which gives them greater incentive to preserve relationships and ties to the community.

Family business feel with personalized service:

Most small firms are very hands-on enterprises and focus on personalized service and relationships. For clients who are used to this type of approach, a small firm will provide them with a similar client experience to what the selling advisor has provided them.

Clients serviced by the founder:

Often, in a smaller firm, the founding advisor is still heavily involved in the daily operations of the practice, including in the servicing of clients. These further drive that personalized experience for clients, as well as ensures an actively engaged leadership.

Fewer junior advisors:

Because the founder is still involved, there are usually fewer junior advisors. Smaller firms often leverage support staff and leave the direct client interactions and advising to an experienced senior advisor.

Greater focus on a specific opportunity:

In a smaller firm, the founder is usually the one involved in pursuing M&A deals. Because they split their time between the daily operations and client service, they are more diligent in their acquisitions and pursue fewer acquisitions compared to an aggregator. They also take a more hands-on approach and will take the time to build a relationship with a seller, their staff, and their clients before the transition takes place.

Specialized focus:

Often, smaller firms focus on serving a specific niche or market. They go after acquisitions that are in their existing niche or a close adjacent. This ensures a buyer is experienced in serving that client group and can provide them with specialized advice and services.

The Cons of Selling to a Small Firm

Although a smaller practice can provide a more personalized and specialized experience, there are some drawbacks to selling to a smaller firm. Namely:

Fewer resources and specialties:

Compared to an aggregator, a small practice cannot bring as many resources and specialties to a practice. For a founder looking to offer their clients more or to tuck into a larger practice, a small firm may not be a good fit. Often, in a smaller firm, the founding advisor is still heavily involved in the daily operations of the practice, including in the servicing of clients. These further drive that personalized experience for clients, as well as ensures an actively engaged leadership.

Less acquisition experience:

For many small firms, acquisitions are few and far between. As such, they don’t have the in-house experience necessary to pursue, structure, and transition acquisitions. They also split their time and attention between client needs and the daily operations of the existing practice, leaving them with limited resources to manage an acquisition.

Limited capacity creates challenging client transition:

As mentioned above, a smaller firm has limited capacity for acquisitions. This can seriously affect the client experience during the transition, which can cause attrition or other issues that may impact the deal.

Not employing the latest technology or trends in client service:

Often, smaller firms are slow to adopt new technologies and processes. They may not be the most efficient or up to date in how they service clients. As clients become more tech savvy and discerning, the need for a forward-thinking approach becomes more necessary.

Acquisition leads to new growth pain to develop next level structure:

Most small firms aren’t adequately prepared to serve an additional hundred to two hundred new clients overnight. Often acquisitions create structural issues and highlight problems that impact profitability and operations.

More risk adverse and less likely to pay a premium:

Because smaller firms have less access to capital, they are more risk adverse and often opposed to paying a premium for a practice, even if the earning potential is there to support a higher price. For an advisor whose retirement hinges largely on the liquidity generated by a sale, you want to get as much money for your practice as possible. While still finding the right fit, of course.

When choosing between an aggregator or a small firm, there is no one size fits all solution. Each practice is unique, and each advisor has a different vision for their succession. You need to determine what matters most to you. Then, select not only what type of firm is a better fit, but specifically, which buyer has the right culture, approach, and personality to provide you with the client legacy you want and deserve.