Joe Duran and United Capital Financial Partners turn the equation on its head.
Listen to folks who make their living in the practice succession/transition marketplace, and they'll tell you to build value in your practice before you sell it.
Heck, that's just common sense isn't it? Perhaps, but the insinuation is that you'll never realize that value in your selling price if you don't create it yourself. Yet, that's not always true. A firm buying up advisory practices--United Capital Financial Partners, a Nevada holding company--stakes its success on just the opposite philosophy: Help advisors build value after they sell and then let them share in the increased valuation.
Explains Joe Duran, United Capital's CEO and co-founder, this is how United Capital differs from roll-up firms, the best-known of which is probably National Financial Partners. "We buy a firm and create a sum that's greater than its parts. Roll-ups don't traditionally do this. NFP is focused primarily on creating a size arbitrage. They don't typically change the value of the underlying business, so they must keep doing more and more acquisitions to keep up the value of the total entity."
Duran, the author of two books on investing and business creation, spent the last decade building Centurion Capital Management Corp., a multibillion-dollar-under-management firm he and his partners sold to General Electric's GE Financial in 2001. He says United Capital usually increases a seller's revenues by 40% in the first six months after acquisition. In fact, says Duran, their system works with both commission- and fee-based firms. A commission-based practice they acquired in September with $1.1 million in revenues is on track to realize $1.9 million in revenues for 2006; an investment advisory practice they purchased earlier in 2005 increased from $700,000 in revenues to $1.2 million over the next year.
"We are a true strategic partner. We increase both the acquired firm's assets and revenues while reducing the amount of work to the seller. In short, we make it more about the business than the principal, and that has a positive effect on value." As a side benefit, says Duran, client relationships usually improve in the process.
But let's start from inception: How might this process work from beginning to end? Assuming the selling firm meets United Capital's qualifications (more about this later), the seller is characterized based upon his or her personal desire to remain with the business. "Some sellers want to walk away immediately, some want to buy out a senior partner, others want a timed exit, and still others want to stick around and manage their firms--now a part of a larger entity--indefinitely," says Duran.
This ultimately affects the sales price because, in negotiating that price, sellers buy back their compensation, so to speak. That is, they decide what portion of their existing net cash flow they want to keep as their compensation for the managerial work they will perform for the business going forward. "Employment agreements are typically a minimum of two years, unless the seller needs to walk away immediately," says Duran.
The purchase price they receive is based on the remaining cash flow, which they may take in the form of cash, notes, or United Capital stock. Finally, as they participate with United Capital to build the assets and revenues of their business, they receive a negotiated percentage of incremental revenues.