3 reasons I sold a majority stake in my firm

You’ve no doubt seen the rapid-fire reports of the M&A frenzy in the advisory sector. If you haven’t considered a transaction, I’d like to explain why you should.

My partner and I started our RIA more than 25 years ago. We’d built a team of about 60 associates and we were growing. However, we found we had some challenges: First, the investments that we were making in infrastructure were limited to the cash the business was able to generate, and, second, because we were so focused on cash flow, we never felt comfortable investing all of the profits back into the firm.

After meeting with a handful of entities, two years ago we sold a majority stake in our company to a private equity firm. Here are just three of the reasons why it was one of the best decisions we’ve ever made.

First, for most principals, the first few years in business are about survival. After survival, it becomes about generating enough profit to take care of the family.

As the years went by and our business grew, our cash flow improved, but having personally grown up in modest circumstances, the poverty mindset never left me. Intellectually, I knew that I could afford to take bigger risks and invest more in the business, but the nagging fear that the survival of the firm was in question never left me.

Once I sold a majority stake, much in the same way I would advise a client, I took enough “chips off the table” so that I was adequately diversified. However, and this is key, I still have enough equity that I’m highly motivated to continue to grow the business.

Frankly, I’m now able to make rational investment decisions as they relate to the business without worrying about how my family will be impacted if something doesn’t go as planned. And that means that professionally, I’ve never been more at ease.

The second aspect of selling has to do with freedom. Over the years, I’ve become pretty good at delegating and focusing on the things that bring me joy, but there were always going to be operational tasks that I didn’t like doing.

Today, 95% of my workweek is spent doing what I’m best at: growing the firm. Now that I’m part of a larger organization, I no longer worry about payroll, taxes, rent or insurance. I’m much more energized than I’ve been, and more focused, and these things benefit both the business and me.

Third, and finally, comes valuations. We completed our transaction when valuations were high. Since that time, multiples have expanded even more dramatically.

When it comes to valuations, I don’t know where things will go from here, but we are probably closer to the top than we are the bottom.

Over the past two years, we’ve acquired stakes in seven firms. In speaking with those advisers, and with advisers who have sold to other firms, all feel the same way that I do. Simply, if you’re a principal, now is very good time to find out what are your options.

[More: Stop being so digital]

Scott Hanson is co-founder of  formerly Hanson McClain Advisors, a fee-based RIA with $8 billion in AUM.

Written by Investors Wallets

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