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.
With the sale out of the way, the work begins to increase the value of the acquired firm. "In every case, we find that the clients have needs that the firm is not currently fulfilling--typically because the firm does not have the resources or experience in house. We provide the know-how, the training, and the resources. It's a real partnership. We all have the same stock, and everyone is incented by the success of the acquired firm."
United Capital's acquisitions reflect revenues that are approximately half commissions and half fees. "Fee-based practices have more predictable revenues. We can perhaps make bigger improvements with commission-based practices, but they come with more risk."
Value building doesn't end with these strategies. United Capital also employs what it calls "tuck-ins." "Once we've optimized the practices, we do tuck-ins, that is we grow the businesses further by acquiring and folding in new books of business." A signature practice, as Duran calls his acquires, might have client assets under management or administration of $100 million to $500 million; a tuck-in would typically add another $20 million to $50 million in client assets.
The mechanics of these business combinations are that United Capital maintains a home office and sellers continue working from their existing regional locations. "We have on staff a number of CFPs, CFAs, MBAs, and other specialists--20 employees in all--that assist with everything in the back office from compliance, to managing staff, to managing office equipment. This frees up the principals [sellers] to do what they do well--manage the client relationships--because we are a client-concentric business. Our team ran an academy and consulting firm that applied these systems to hundreds of practices. They are time tested and proven. And this acquisition strategy is one we have made successful in the past."
What's the market for United Capital stock, should the seller have accepted some as part of the deal and wants to sell it? "We get our firm valued regularly by an outside party. Sellers can sell their United Capital stock after three to five years, and we'll give them liquidity at a modest discount to the price according to United Capital's valuation at that time."
Thus far, United Capital has acquired seven firms. "We currently have around three quarters of a billion dollars of client assets under administration and another $200 million coming in under Letters of Intent. Additionally, we're in discussion with firms representing about $6 billion of assets of which we expect to realize $500 to $600 million within the next six months. Not bad for a firm that's only 15 months old."
Duran says United Capital's ultimate goal is to build a national network of boutique financial services practices that provide customized service, comprehensive planning, and objective, expertly applied investment management in a highly client-centered service model.
Do you see your firm as a potential candidate? If so, you can e-mail Matt Brinker, United Capital's vice president of business development, to schedule a sit-down with Duran. "We're highly selective," says Duran. "We want a select group of great practices, not 1,000." And yes, if you just want to sell and walk away, they'll talk to you, too.
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