RIA Valuation Insights

A weekly update on issues important to the Investment Management industry


Practice Management

Buy-Sell Agreements for Investment Management Firms

An Ounce of Prevention is Worth a Pound of Cure

As difficult it is to imagine a valuable car such as the Ferrari 250GT SWB that we feature in this post being forgotten, what we see more commonly are forgotten buy-sell agreements, collecting dust in desk drawers. Unfortunately, these contracts often turn into liabilities, instead of assets, once they are exhumed, as the words on the page frequently commit the signatories to obligations long forgotten. So we encourage our clients to review their buy-sell agreements regularly, and have compiled some of our observations about how to do so in the whitepaper. We hope this will be helpful to you; call us if you have any questions.

Current Events

The SEC’s Proposed “Transition Plan” Requirement is One More Reason to Think about your Firm’s Ownership

By now you’ve probably read the SEC’s proposed rules on Adviser Business Continuity and Transition Plans. Most of the proposed rule simply codifies a reasonable standard for practice management at an RIA. Certain of the proposal’s requirements, such as IT management and being able to conduct business and communicate with staff and clients in the event of a natural disaster, are likely to be met with turn-key solutions from vendors. Of more interest is how the requirement for a “transition plan” in the event of the death or incapacitation of an advisory firm owner will be implemented.

The Importance of Specialization in Investment Management

A Review of Philip Palaveev’s The Ensemble Practice

In an industry characterized by constant pressure to adapt to market conditions and offer highly specialized client service, many financial advisors still spend a significant portion of their time acquiring new clients rather than collaborating with other professionals. According to Philip Palaveev in his recent book The Ensemble Practice, the majority of financial advisory practices still function as “solos,” or one individual against the entire market. This practice is inherently problematic in its lack of sustainability and the problems it poses for an owner who desires to leave a legacy post-retirement.

Resolving Buy-Sell Disputes

On Being a Jointly Retained Appraiser

The closest we get to detective work at Mercer Capital is when we’re jointly retained to resolve a shareholder disagreement over a buy-out. Whether we’ve been court-appointed or mutually chosen by the parties to do the project, we’ve done enough of these over the years to learn that the process matters as much as the outcome. In this post, we discuss our process for handling such engagements.

Ambiguity in Buy-Sell Agreements is Expensive

Despite talented people, carefully developed business plans, and the best of intentions, not every partnership goes well, and some of those that don’t go well don’t end well either. When a partner leaves an investment management practice, the potential for a major dispute over the buy-out usually looms. Internally, at our firm, we sometimes refer to these situations as “business divorces”, even though the consequent acrimony often exceeds that of a marital dissolution. Here are a few mistakes we’ve seen others make, in the hopes that you read this and don’t do the same.

Why Should Your Firm’s Buy-Sell Agreement Require an Annual Valuation?

It’s all about Expectations Management

A recurring problem we see with buy-sell agreements are pricing mechanisms that are out of date. Keeping the language in your agreement up to date is important, but the most reliable way to avoid some unintended consequence of your buy-sell agreement is to have a pricing mechanism that specifies a regular valuation of your RIA’s stock. An annual valuation accomplishes a number of good things for an investment management firm, but the main one is managing expectations.

When Buy-Sell Agreements Blow Up

What Would Mom Do?

The subtitle of Chris Mercer’s original book on buy-sell agreements is “Ticking Time Bombs or Reasonable Resolutions?” Implicit in this title is that parties to buy-sell agreements too often discover the painful implications of the question never asked. I think about this every time we work on a dispute resolution project involving a buy-sell disagreement. In particular, I think about one of the first ones that I worked on, where maybe there was no disagreement, but should have been.

What Matters Most for RIA Buy-Sell Agreements?

In Our Experience…

If an asset manager’s buy-sell agreement is going to specify reasonable expectations for the value of the firm, what are they? We think there are at least four elements that should be clearly stated in each buy-sell agreement to ward off costly ambiguity.

Is Your Buy-Sell Agreement Purpose Built?

An Introduction to the Topic for Investment Management Firms

This post launches a series on buy-sell agreements, specifically as they pertain to RIAs. Buy-sell agreements are peculiar contracts between shareholders with a very specific purpose: to provide for the transition of ownership and liquidity in a business, usually in case of a specific event. Outside of a particular event, buy-sell agreements usually sit on a file server or in a desk drawer, and no one thinks about them, until a need arises to pull out the agreement – at which point no one can think about anything else.

Business Divorces at RIA Firms

Many times, conflicts with shareholders are unavoidable and are the natural bi-product of ownership transition and firm evolution. In these instances, a carefully crafted buy-sell agreement (“BSA”) can resolve these disputes in a fair and equitable manner (from a financial point of view) if the valuation process avoids common pitfalls. In this post, we discuss these pitfalls and how to keep your buy-sell agreement free of surprises.


Success and Succession Offers Targeted and Often Unexpected Insights on Internal Ownership Transition at RIAs

As the Baby Boomer generation continues to age toward retirement, many “founder-centric” asset management firms face the prospect of internal succession. The recent book “Success and Succession,” by David W. Bianchi, Eric Hehman, Jay Hummel, and Tim Kochis, is written from the perspective of three individuals who have experienced successful ownership transitions. The book provides some interesting insights into the logistical, financial, and emotional process that internal succession entails through colorful accounts of past triumphs and train wrecks.

Five Things to Improve the Value of Your Investment Management Practice

Which Have Nothing to Do with the Stock Market

This post provides some brief thoughts about five topics, posed as questions, that can make or break the value of RIAs. These topics have longer term and more strategic implications than the day-to-day fluctuations in capital markets, and while equity research may be more fun, these are more reliably lucrative.

Asset Management

Asset Manager Valuation and Rules of Thumb

The shorthand method of valuation in many industries has long been some kind of “rule of thumb,” usually a multiple of some measure of gross scale or activity. In this post, we consider the pitfall of relying strictly on a rule of thumb.

Asset Management

The Valuation of Asset Management Firms

In this week’s blog, we present a new whitepaper with some summary thoughts on the valuation of RIAs. Understanding the value of an asset management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, asset management firms exist in a narrow space between client allocations and the capital markets, and depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the particular risks and opportunities of a given asset management firm is fundamental to developing a valuation.

Investment Management

Mercer Capital provides RIAs, trust companies, and investment consultants with corporate valuation, litigation support, transaction advisory, and related services