The RARE Advisor: Understanding M&A Bogeys

Recently, I spoke to two ways you can quickly calculate the valuation of a financial advisory practice. Now, that's a really handy tool, whether you're purchasing an advisory practice or whether you're selling an advisory practice. It's not just for succession and retirement and transition. It's also on the other side of the equation, if you're outgrowing and building your business through acquisitions. But that always then creates the next conversation, which people seem to really get hung up in the weeds on, which is what I call the bogeys. Some people call them bogeys, some people call them thresholds, some people call them floors, but just about every deal out there will have one form of a bogey or another. Now, normally the way a bogey works is the bogey can be on either side of the equation, to protect either the buyer and/or the seller. With the typical bogey, where you see it most often, it's a floor that creates some protection for the seller, but also some protection for the buyer.

So let's just say the bogey is at 90%. What that means is that as long as the value of the practice maintains itself at its current level, or up to 10% in decline (it can't go below 90%), then the payout to the seller will be the full agreed upon payout number. Now, if the valuation were to drop below 90%, then it will go to a pro-rated adjustment. So let's say it goes down to 85%. Well, now the seller is only get going to get 85% of the payments that they normally would have agreed upon. The way that this normally gets calculated is either based on revenue, or assets under management, or number of clientele, or some formula that is agreed upon that combines those things. But just think in terms of revenue, that's the easiest way to do it. If the firm had been running at a million dollars of revenue and now it's running at $920,000 of revenue, well, that's still above the 90% number. So they will still get paid just as if it had been a million dollar deal. But, if it falls down to $850,000 of revenue, then the payments to the seller are going to go pro-rated down to 85% of whatever that number had been.

Now, you can also partake on the upside. So maybe a seller says 'Well, okay, if I can lose it on the downside, then I want to be able to gain it on the upside. And I really want to help you in this transition. And I want to make sure that not only does this business come in play, but we comb through the existing client base, and we identify the assets that maybe I didn't previously get. I'm going to help you get them in the new deal. So, therefore, if the value of the firm increases by over 5%, then I get an increase in the payments as well on a pro-rated basis.' So they can go either way. It depends on if you're a buyer or seller how you might want to negotiate that, but it is important to understand that they all pretty much have these bogeys in the deal.

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The RARE Advisor is a business model supercharged by Recurring And Repeatable Events. With more than thirty years of working with and coaching successful advisors, host Mike Walters (along with other leaders in the industry), discusses what it takes to grow a successful practice. With the aim of helping financial professionals and financial advisors take their business to the next level, Mike Walters shares insights and success stories that make a real impact. Regardless of the stage of your practice, The RARE Advisor will provide thoughtful guidance, suggestions for developing systems and processes that work, and ideas for creating an authentic experience for your clients.

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