Equity and Interest Rates: How It Affects Advisor Deals
I think most advisors across the country understand that when interest rates are high, access to cash is more difficult. I find that many advisors though haven’t fully considered what this means when it comes to the structure of deals if they want to transition or exit a business.
Yes, Cash Deals Are Harder to Find
If you have been considering a 3-5 year timeline for an exit, the landscape has changed dramatically in the last 12-18 months. For advisors I started working with during the low-interest rate environment, cash-heavy offers were the norm.
I saw deals on the table that were 80-95% cash with up to 70% upfront. In some cases, it was actually hard to get equity as part of a deal.
Today, it's very, very difficult to get a deal without equity.
I’ll give you one brief example.
Case Study: 90% Cash Dropped to 60% in 12 Months
I was working with an advisor in the last 12 months that was in talks with one of the larger brands in our industry. Initially, they had cited an 85-90% cash offer, which was specifically important to my client.
By the time we saw the first formal offer, that had shifted all the way down to 60% cash, 40% equity. Financially, it was just a better fit for the firm. For my client, it effectively ended the conversation.
The landscape changed that quickly in the case of this deal.
Thinking Strategically About Equity-Heavy Deals
With interest rates being higher, you have to get a little more strategic. If you're a seller and you want as much money up front as possible, here’s what I’m seeing.
The money is there, but if you are looking for 8-11 times cashflow or EBITDA, you may have to be willing to stay on longer in your business. The quicker you want to exit the business, the heavier the discount (in terms of cash) a firm will ask for.
Many of the offers I’m seeing where an advisor wants a premium multiple are being met with requirements to stay on the firm for 2-5 years. It’s not necessarily a good or a bad thing–it’s all about how it fits you.
Adjusting Your Exit Timeline for Higher Equity Deals
I’ll first speak to advisors who are looking to exit their business. How does an equity-heavy deal environment affect your timeline and financials? This is a key question, particularly in terms of maximizing the value of your best investment.
The first thing I would tell you is to begin considering an exit well before you feel that you need one. We don’t know what interest rates will be like in 3-5 years, but if you assumed the recent surge of high cash offers was a norm, the earth moved beneath your feet.
Start doing the due diligence early and give yourself maximum flexibility in terms of a smooth, valuable off-ramp for your practice. If you think you are within 5 years of your desired finish line, now is absolutely the time.
Factoring In Equity to the Value of Your Deal
Now, if a coming exit isn’t the immediate priority, let’s focus on how to assess a deal where equity plays a larger role. Ultimately, you really need to understand what is going on at that firm. The trajectory of the firm becomes the #1 variable in your outcome.
I always ask questions like:
What inning are we in?
If we’re in the 1st or second inning, so to speak, and a firm has a high degree of upside trajectory, how confident are we that they have the people and strategic plan in place to drive that growth?
Or maybe a firm is in the 8th inning–they’re much larger and established, but there’s not a high ceiling for new growth. Do you need to worry about your equity being diluted as they recruit more advisors?
Is private equity part of the growth plan?
To give you an example, I know a firm that had one private equity backer, and quietly, they sold another 30% to acquire another private equity backer. How do the presence and priorities of PE players change the experience for your firm (and your clients)?
This feels different, right? I know a lot of advisors who are saying, "Hey, if I'm just going to get equity, I'll just continue to bet on myself, and I'll hire an associate advisor."
How does equity affect my freedom to exit or transition?
And of course, equity is a more complex asset than cash. If you want to truly be independent, you have to understand the ground rules for how your equity might limit your freedom to leave your firm.
Exits have their own set of rules, but especially for transitions: what happens if you really want to move to another firm? How much are you handcuffing your book of business?
In many cases, equity is not a bad deal. For advisors who deeply value their independence, there is a trade that should be seriously considered.
Final Thoughts on Equity
If you are concerned about equity as a variable in your deal structure, I would encourage you that great deals are still happening. The key, in my opinion, usually lies in who has the best leadership and culture. Firms that have those two things tend to have far more stable upside.
But how do you know what’s real value and what’s sales spin?
That’s where it pays to have voices on your side who know the major players at the firms you’re considering. That might be other advisors–peers who have had experiences with firms and leaders.
It’s also what I do for advisors. I swim all day every day in this environment. I’m constantly meeting with advisors and firms, providing a far more complete picture of what firms are offering and what advisor outcomes are like at these firms.
If you’re looking to learn more about:
What firms would be a good match for your business
The structure and value of deals being made
A strong path to a valuable exit
What kind of timeline you should consider for maximum flexibility
Then, I invite you to schedule a fully confidential, free discovery conversation with me. After hearing your priorities, financial goals, and personal values, I can help create a clear strategic plan and a short list of top firms for your vision.
If that sounds good, grab 30 minutes on my calendar. See you there.
