Scaling Marketing To Sell A $2.2B Firm And Lessons Learned

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Executive Summary Resources Featured In This Episode:Full Transcript:Growing oXYGen Through Media Appearances And "Manufactured Celebrity" Approach [6:00]Ted's Motivation For Selling oXYGen Financial [24:44]Transitioning From Owner To Stay On As An 'Employee' [39:44]Starting JPTD Partners As A Consultant For Selling Advisory Firm Owners [49:56]Understanding Valuations And Buy-Out Deals For Advisory Firms [1:05:59]Navigating Marketing Growth Rates [1:18:34]The Surprises And Low Points Ted Experienced On His Journey [1:22:59]Advice For Advisors Looking To Sell Their Firms [1:27:08]What Success Means To Ted [1:28:38]

Executive Summary

Welcome everyone! Welcome to the 364th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Ted Jenkin. Ted is the consultant of JPTD Partners, a consulting firm based in Atlanta, Georgia, that helps financial advisors gather offers, negotiate, and ultimately sell their advisory firms.

What's unique about Ted, though, is how his journey to facilitate financial advisor mergers and acquisitions started from selling his own $2.2-billion AUM advisory firm that he spent more than a decade building… and the perspective he gained as a founder who sold his firm influences the way he now helps other advisors prepare for and understand the acquisition offers placed in front of them, and their own options to exit the firms that they may have spent their careers building.

In this episode, we talk in-depth about how, after Ted went through the challenge of getting multiple offers to sell his firm and struggled to figure out how to compare them, he found that many other advisors were asking him for advice based on his experience and ultimately decided to build a consulting firm to help fellow advisory firms field and compare multiple acquisition offers at once, how Ted has now come to see himself as a "Zillow for an advisory practice's worth" as he got deeper into the weeds of evaluating how buyers really assess the value of an advisory firm and price its 'true' profit margins, and how Ted's unique niche as an advisor who sold helping other advisors to sell has led to the point where after just a few years his firm is now representing 115 active advisory firms actively shopping for a buyer (allowing him to get even deeper into the current trends of what buyers are really offering and how to maximize the value of a deal).

We also talk about how Ted initially built his own advisory firm with what he calls a "manufactured celebrity" approach by immersing himself in media appearances that made him a go-to local advisor in the Atlanta area, how the success of Ted's marketing approach ironically led to severe burnout (because Ted enjoyed marketing to clients far more than the ongoing servicing of clients and management of a large multi-billion-dollar firm) that resulted in him exiting 'early' when he was still in his forties, and how Ted overcame his nerves of "becoming an employee" again as a result of selling the firm and negotiated his own buy-out deal to play into those same strengths relating to his ability to grow (ultimately resulting in a bigger payout for himself).

And be certain to listen to the end, where Ted shares what he would recommend advisors consider in their own exit plan to maximize value ( even if the transition is still years down the road), how Ted has often found that determining the real value of a firm is more complex than 'just' looking at the bottom line of a firm's profitability, and how Ted learned that while he had considerable strengths in some parts of the business, he wishes he had outsourced his weaknesses to others sooner despite his fear of giving up control (and realizes that if he had, he probably would have been able to stay with the business longer and continued to build it even bigger and make it even more valuable).

And so, whether you're interested in learning how Ted helps advisors navigate mergers and acquisitions by diving into how buyers really assess the value of advisory firms, how niching down helped him scale his consulting firm, and his transition from business owner to employee post-sale of this firm, I hope you enjoy this episode of the Financial Advisor Success podcast, with Ted Jenkin.

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Resources Featured In This Episode:

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Full Transcript:

Michael: Welcome, Ted Jenkin, to the "Financial Advisor Success" Podcast.

Ted: Good to be with you, Michael. Looking forward to this.

Michael: I'm really excited to have you join us. You are now one of a very small exclusive club of, I don't know, I guess I'm going to call it the 2-timers. You're joining us for a 2nd time. You were out in one of the first 100 episodes of this podcast back, more than 5, almost 6 years ago now with what was at the time an incredible practice. You guys had grown a billion dollars in 10 years, all organic with just this incredible marketing machine and systems that you'd built and scaled.

And I know in the years since, the firm continues to grow further, which I'm excited to talk about. But even more so, you sold it, and now have gone down the road of working with consulting with other advisors about selling their businesses as well. I find it interesting because one of the fundamental challenges for any of us when we build these advisory firms to sell, most of us will only ever do this once in our lifetimes. You spend 30-plus years building your advisory firm over your career, and then when you're ready to retire and exit, you sell. Some people even are in for 40 years or 50 years, maybe it's just 20 if you start it a little bit later and as a career changer.

We build the whole thing over our career. We sell it once. You basically only get 1 shot to do it right. And almost by definition, you don't know anything about how this works because you've never done it before. And then by the time you do, you're done and you've retired and went off into the sunset. And so, the fact that you've come to this from a different path, both for what you built, you functionally sold it much earlier in your career, you are not by any means retired, and still moving on to build more other businesses along the way.

And so, I'm both excited just to talk about where the firm went in the 5-plus years since you were joining us in 2018 at a billion dollars, but also, just the lessons learned and the experiences of having been through the sale and now continuing on the other side in working with other advisors through their sales, and what you've learned now that you've seen all of this. So, I think to start, because there's going to be a lot here we're going to be getting through, to start, just catch us up on the advisory firm. Again, in 2018, you guys were crossing a billion dollars under management. What's happened with the advisory firm over the years since?

Growing oXYGen Through Media Appearances And "Manufactured Celebrity" Approach [6:00]

Ted: Well, look, it's been a remarkable last 5 years for me, transformative, if you will. When we end this and you see what I'm doing today, had you told me I'd been doing that 5 years later, I would've said, "No way," because it definitely was not a design plan. But the firm now has about $2.2 billion that it's handling for clients. So, it's literally almost doubled in value. And I don't know if it's that Rockefeller slogan where they say, "To turn $100 into $110 is hard work, but to turn $100 million into $110 million is inevitable."

But I think all advisors need to realize their client's wealth, that when you get size and scale in your business, it's like getting to $100 million is tough, $200 million happens quicker. I think the same thing is, once you get to a billion, it's hard, but to get to $2 billion is quicker because we are, and the firm still is organically this year going to bring in $250 million of new assets. It's a significant amount of new asset flow.

Michael: Which I just put in the context. So, you went from a billion to $2 billion-plus in about 5 years. But it took you 10 years to get to a billion in the first place?

Ted: Correct.

Michael: As you're saying, you're going to do $250 million in new assets this year. And I'm going to guess it was, what? 5- plus years to get to 250 million cumulatively, from scratch originally?

Ted: Yeah. Because, look, I think a lot of big firms realize this. When you're a smaller boutique shop or you're a 1-person, 2-person shop, no matter how good you are at your craft, the truth is that clients that have maybe $5 million, especially at $10 million plus, the set of services that they need and the cache of the firm that they're looking for, it's not that you're a bad advisor, they're just probably not going to give you the money. Which is why for years, the big wirehouses got all the money. But now we've got larger, bigger independent firms where clients that have that kind of wealth, and more of them are having it, are seeing the value in those kinds of companies.

I'll also tell you, and I'd say this, and you might laugh when I say it, to a degree, celebrity is manufactured. And a lot of advisors that do well, somebody in the firm has some level of manufactured celebrity, meaning that they may be on CNBC, or... I was doing TV every single weekend for CNN Headline News. They didn't really make me a better advisor, Michael, but people that had larger money said, "Hey, I see you on national TV, you must be good." And I said, "Well, you can think what you want to think, if that's what you want to think. I don't think I'm bad, but if you think I'm good, then we'll take more of your money."

And that scaled as your size of the firm grows and the manufactured nature of your celebrity grows. I really feel that.

Michael: All right. I actually want to understand this a little bit more, because there is a piece of what you're saying here that strikes me, and frankly, I feel contrasts with the experience that I see at a lot of advisory firms where they power forward to, what I often find is this billion-dollar threshold where you grow a firm, you get there. For a lot of advisors, they don't even do it in the 10 years that you did, I find 15, 20-plus years is much more common. And by the time they get there, the growth rate doesn't turn up where 10 years for the first billion, 5 years for the second, it slows down for...

It is a sort of phenomenon I've always called the "Tyranny of the Denominator," which is when your firm's a billion dollars, 10% growth is a lot, it's $100 million. All of a sudden, you're like, "Cool. I need 2 new millionaires every week, all year long just to get 10% growth." Oh, and you're not really going to get that because your retired clients are taking out, so you might have 3% in retirement withdrawals, another point or 2 in tax money that goes out. There's a little bit of client attrition, even if you're doing really well.

And all of a sudden, it's like, "Wow, if I get 2 new millionaires every week, all year long, I'll go from a billion to $1.02 billion." And I may still grow over time because markets tend to lift us, but organic growth rates for a lot of firms really start to flatten because, all of a sudden, like when you're at a billion dollars, 3% client attrition is $30 million out the door, 3% withdrawals is another $30 million out the door. And those numbers get really hard to overcome, especially if you're the advisor-founder who's been doing it for 20 years. And you're like, "Wow, I've grown this big firm, I have to work harder than I ever did before just to bring in enough money to tread water."

So, what's different that you guys had seen this uptick as you got to the threshold where others seem to struggle? At least one piece I'm hearing that I have seen in others as well is this, I guess, frustrating reality when you're a smaller firm that there are a subset of larger clients that just have a preference for larger firms. And as your firm gets a little bigger and more established and just has more presence and gravitas and people on the website and visible substance, that you tend to attract some bigger clients, and that there is a "bigger firms get bigger clients" thing. It sounds that was part of it for you.

Ted: Yeah. Michael, first of all, we didn't have the challenge with withdrawals, because when I built the firm in 2008, I don't know if we were the first, but we had to be one of the first that really went after the X and Y generation. And a lot of people said, "You're really stupid for doing that because they don't have any money." And I thought to myself, "But they're going to have some money." And I wouldn't be dealing with that RMD situation where I'd have a bunch of 75-year-olds or whatever age now that we're taking money out of the plans. The average age in the firm right now is 51. So, you have to think about it. We still have a very, very young client.

Michael: Oh, interesting. You have clients, ironically from that end, if your average client age is 51, they're now in what most of us would characterize as peak earnings, peak savings years.

Ted: No, that's true. And we tend to deal, obviously, with a higher wealth Gen X/Gen Y, which a lot of them have a lot more money still than I think a lot of advisors think that they do. But, I always felt when we started the firm, ever since I started blogging back in 2008 and doing crazy stuff on social media that people said didn't make any sense at that time, and maybe it did or maybe it didn't. But in the end, a lot of advisors discount, I think, their brand and how much, at least in a regionalized basis, like if you live in Chicago or... I'm in Atlanta, people said, "Well, what local firms do you know in Atlanta?" We would be one of the firms that they would know.

Now, we spent a lot of money over time, Michael, on marketing. And when I say marketing, I don't mean just direct ROI, I mean indirect ROI, having people care about the brand and how we put the brand into the community and on the radio and on TV. And that allowed us to be able to have more people come to us to bring in those assets irrespective of what was going on with COVID, the markets, whatever it may be. And I think that aided wind to our sails.

Michael: So, can you share a little bit more, what is then the marketing you were doing? Where are you actually spending money, spending time, and effort to build this local presence that you're a go-to firm in the Atlanta area?

Ted: So, for many, many years in here, I was never a big fan of the advertorial Saturday guy or gal radio show. "We're the retirement income guys here." I was never a big fan of that. What I was a big fan of was manufacturing celebrity. And I'll say this again because… I can't stress how big I think it personally is, Michael, in today's society because people are very influenced by what they see, read, and hear. And on the radio shows, we would advertise in a way where we said, "We'll run ads on the radio, but we don't want our own show. We want to be part of the show."

So, we were on weekday shock jock radio shows, we were on sports radio shows, which will feel a disconnect for people, like, "Why would you be some financial person on a sports show?" But we were on these shows and there's just a, "Hey, let us tell you what's going on in the money world in general." And it wasn't always about Roth IRA conversions. It was just talking in general about what's happening because in the end, there's only 2 reasons people did business 30 years ago, and there's only 2 reasons they do it today, people like you and they trust you. And so, we spent quite a bit of money on radio. I did not spend money on TV, I never spent a dollar on TV. But I also learned how to do my own PR.

And you may remember many years ago, you and I started with HARO. I'm going to give somebody something great for people today called UseTMX, it's U-S-E-T-M-X. It's like the updated version of HARO, Michael. It's a process where you get into the backside of the newsrooms. And I find myself on TV, not just on your main stations, but as streaming grows, I was every week on NBC LX, and NewsNation is growing, Scripps, which used to be Newsy. And you may say, "Well, I never heard of NewsNation." Well, News Nation is probably the fifth or sixth-largest news channel.

And people are going to choose where they see the news. But that's not the big thing. See, people think if you go on those things, the phone is going to ring off the hook. That's not it. We became a master at repurposing content, Michael. Every time I'd write a blog, I do a, "What Ted Says" video, I get on TV. We are in front of people all the time. And a lot of advisors think, "Well, I don't want to be in front of people all the time because they're going to get upset with me and not do business." It's exactly the opposite.

Why do you think Progressive runs 8,000 commercials a week? Why does Liberty Mutual run that emu commercial? They do it because it's so much that when you're in to make a buying decision, and in this case, either somebody who's looking for an advisor or changing advisors, we just want to be in the conversation. And we're in that conversation a lot more than other advisors in Atlanta, and that's how we grow our assets.

Michael: So, a couple of following so I understand. So, first, the site you mentioned, TMX. It sounds like this is the updated version of HARO, I guess, for those who don't know.

Ted: So much better. It's so much better.

Michael: So, HARO was H-A-R-O, it was short for Help A Reporter Out. It was a service that got made, I guess in early, mid-2000s where...

Ted: Yeah, you and me both.

Michael: Reporters who were looking for experts, who were looking for sources would put out on HARO like, "I'm doing an article about 529 plans. Who's an expert in 529 plans who can help me?" And you could sign up for the HARO lists and respond. And if you were one of the first people to respond, because they often would get a bunch of responses, but if you were one of the first people to respond, you could connect and say, "I've got expertise on 529 plans. I'd love to help you out with your story," and you would get an interview with a reporter or a chance to do a radio thing or a chance to do a TV thing.

And so, it led to a lot of media appearances. And I think both you and I, Ted, used it in the late 2000s, early 2010s. So, TMX, I guess is the new version of that. So, you sign up and then reporters who were looking for sources say, "I'm looking for an expert on," blank. And if that's your thing, you could respond to them and try to participate.

Ted: But it's a tighter, narrower circle. HARO's kind of become watered down with podcasters and people that write books and anonymous sources. TMX is at the heart of the newsrooms, talking directly to Fox, CNBC, CNN. And when they want to get somebody on camera, you got to be ready now. I don't care if you have four appointments today or you don't, you got to be ready to get on camera now. You got to be ready to quote now. So, this is part TV-driven, part quote-driven, but it is the best access that I've ever seen to the backside of newsrooms.

And take it from a guy who I know the newsrooms. I did weekend headline news for 9 years, so I know what they look like. And it's a tremendous source that I use today. I don't have clients anymore, but I still do 8 to 10 TV hits a week.

Michael: So, that's part of what I was going to ask, how many media appearances were you doing? For a lot of advisors, we try to fit this stuff in somewhere, or maybe at some point... A couple of months ago, I got an interview thing with Wall Street Journal, New York Times… That's a huge win for a lot of us. But you're talking about, "Oh yeah, and I did 8 TV things a week." How much media stuff were you doing?

Ted: I was on somewhere once a day. Now, tongue-in-cheek, you're probably 15 minutes in the waiting room waiting for the show to go. Your news segment is all of 3 to 4 minutes, and then it's over. So it's a half an hour. And people who need to prepare a lot for those segments, it's going to be difficult. But if you're pretty good on your feet and you actually do have knowledge, which most people say they do, then you don't need to do as much research. I did one yesterday on fantasy football insurance, Michael. And it was just topical with football season starting, and people saying, "How does that work? Do people actually buy fantasy football insurance?" And we had a little dog and pony show for 3 minutes on national TV.

It does take time, but what comes first, the chicken or the egg? Are you an advisor or are you a marketer? Are you an asset gatherer or an asset manager? I would never claim on this podcast or anywhere else on this planet, Michael, to be the best asset manager that was out there. I'm sure people that are listening are 10 times better than me. But I was great at new business development, and that's what I did. And that's what I was doing, new business development.

Michael: I was going to say, how do you find time for that?

Ted: Well, it's a function of priorities. You have to decide what really makes the money in the business. I decided the highest paying job in America is marketing. So, I spent as much time as I could with marketing, but it's also what got me to sell the practice because I got too weighted down in seeing people. I wanted to cut off my left toe. I loved doing the marketing, I just hated doing the rest.

Michael: Interesting. And do you worry from the other end, when you become such a figurehead, visible person of the firm, does that create challenges or risks for the firm like, "I won't be able to sell this because the firm can't grow without me?" Does that become a fear?

Ted: Here's the good and bad side to it. The good side is that if you're really good at it, you can generate a crap load of leads for the firm. The bad side is that if you choose from day 1 or day 5 or year 5 that you're actually going to serve the clients that you bring in, that's when you're going to get crippled. That's where the quicksand comes in. So, either be the marketer or be the advisor, but trying to be the marketer and be celebrity manufacturer and also be the advisor is a mistake.

I made that mistake, Michael, I did. And I wouldn't have done it that way again. If I built it again, I just would've been the lead dog and been the marketer. Once the systems are built, now you can sell the firm.

I was running at 5 meetings a day, call it 25 meetings a week. I literally, this is no joke, I'll get you a picture of this, I set up a little bar in my office. And at the end of the day, it's like, "What kind of cocktail am I pouring myself?" Because I don't know what I did to myself here by taking on all these people. And it was destroying me. It was destroying every fabric of my life. I was completely miserable going home. It wasn't I didn't love the business. I did. I just loved the front end of the business. Some advisors hate it, I loved it. I hated the rest, I hated it.

Michael: Yeah. I'm struck by this, for a lot of advisors, like, "Oh, I just wish I could hang with my clients and not have to do all that marketing stuff. It's so draining." So, I'm fascinated, you were the 180-degree polar opposite. You just wanted to get out there and keep driving the growth and doing the media work because that was fun and it was driving so much results. It was the client activity that was dragging you down.

Michael: But you had a lot of advisors in the firm, right? What prevented you from just getting the clients over to those clients, shifting the clients to those advisors and just trying to get the clients to just do the meetings with your other advisors and not you?

Ted: This will be maybe shocking to people, Michael, or not. I realize after a while I'm a great marketer and I'm great at developing new business. I feel I could do it toe-to-toe with anybody in the country. In the end, I don't know if I was the greatest business operator, Michael. You know what I'm saying? I just don't know if I was the best at it. And honestly, I hated managing people. I really did. And then holding people accountable. And even though I had operations people in there, it was a lot.

Ted's Motivation For Selling oXYGen Financial [24:44]

I was completely burnt out. I was not having the kind of fun I wanted to. I would get a moment of fresh air when I do one of the TV hits or go on the radio because it's like being a comedian. I get on stage, the adrenaline rush is huge. And I loved it. I loved that adrenaline rush. And then I'd come back to real life, Michael, and I would be like, "Oh my God, do I live here? Is this my house? I don't even want to be here."

I didn't want to hurt the firm. I didn't want to hurt the people. I have great people. We had great clients. It wasn't anything about that. And that's what caused me to get down this path of thinking, "How can I exit out of this thing because I'm not having fun?"

Michael: So then, what came next? Just in practice, how do you queue up like, "So, I think I might want to sell my multi-billion dollar firm?" And I feel I'm putting context... At a point that I'm assuming some people wouldn't expect, because you're a young guy. Can I ask how old are you now?

Ted: Well, I'm in my early 50s now, but it was at the time I was in my late 40s. Yeah, I was young, dude. I still feel like I'm in my prime.

Michael: A lot of advisors do this well into their 60s, into their 70s, I've seen a few go into their 80s right now. So, how do you start queuing up a, "I'm thinking about selling this 20 to 30 years earlier than some other advisors might have done this transaction?"

Ted: I think for everybody, you have to decide why you're building the practice. Is this practice going to be a lifestyle business where you golf 4 days a week and you make 500 grand and you work 9 to 3? Or, I know some people take the summers off in the business. It could just be that kind of business. I have always been an entrepreneur by nature. And the nature of having licenses, like people that are licensed with FINRA, I know some people are not, when your license is a Series 7, Michael, it's completely the antithesis of being an entrepreneur. Because every time you fill out an outside business activity, basically, you're on death row.

Michael: So, that becomes a challenge in the regulated context. Every new entrepreneurial endeavor is an outside business activity. And I guess even worse, every time you invest into a business or transaction a business, you have private securities transaction disclosures.

Ted: Now you're talking.

Michael: Now you're dealing in unregistered securities. It's like, "No, I'm starting a business." "You're dealing in unregistered securities." That's a fun compliance conversation.

Ted: Yeah. It's not true for all people that are in our business, but I think for people that are diehard entrepreneurs, especially those that carry a Series 7, not people that may be pure RIA, it's a challenge.

Michael: Because you were BD-affiliated in this context?

Ted: Yes. Yeah. Because I was BD-affiliated, every, like, 3 weeks, I'd be submitting another OBA. I had someone call me from compliance, like, "We've run out of room in your U4. We don't have any more room anymore in your U4."

Michael: Turns out there's only so many line items of OBA's that can fit.

Ted: Yeah. That's a true story. I had a compliance person ask me, they said, "We're running out of room on your U4." I'm like, "What does that mean?" They go, "Well, you only get so many characters in your U4 to write outside business activities, and you've run out of them." And then they're like, "How do you possibly have this much bandwidth to do all these things?" I found it frustrating, Michael, to have to explain myself all the time. It's just some of us are able to do more things and some of us not. And the mundane day-to-day thing with clients was difficult. I had a bunch of good G2s in my office, but frankly, the business got too big to really sell it out and get my cash out as quick as I would've liked with other people in the firm.

Michael: Because if you're doing this with next-generation advisors when you're billions of dollars, they can "afford" it if you just finance it over like 10-plus years and take on seller financing risk and all that. But then you're hanging around 7 to 10 years and hoping that everything really goes smoothly to get your dollars out when there are other buyers that do mostly upfront payments now.

Ted: Yeah. Well, there's a whole number of ways, but I didn't really know that much about it. And I don't know how I would've actually approached it at that time, but by fate or by luck, whatever it may be, I think this was in the end of 2018 or early 2019, a big private equity firm called Warburg Pincus, most people probably know Warburg, they bought most or all, I can't remember what it was, but probably most of it, of the broker-dealer, Kestra. I think at the time, they owned Grove Point, not anymore, and something called the Arden Trust Company. And then they developed their own M&A firm called Bluespring Wealth Partners.

Obviously, the CEO was great. I was at a conference with him in early 2019, and I said, "Look, I'm looking at selling this." And they're like, "Well, maybe you could be our first transaction." I thought, "Great." And I was always under the...

Michael: It's right there under the BD. Literally, Warburg wants to fund this to do transactions. That's about as perfect of a…

Ted: No repapering.

Michael: No repapering, it's already in the system.

Ted: No change of brand name, no nothing. But you've got to realize, this is Ted Jenkin at the time, pretty clueless about how all this exactly should work. All the years that I looked at FP Transitions or Succession Link or talked to other advisors, there's always been this...and I know it's changed over time, that maybe you could get 2 to 3 times recurring revenue, maybe it's 1-time on-commission revenue. And I had that in my head. And as I went through this negotiation process with Blue Spring and Warburg, it was so interesting to me because... here's what I never thought about, and this may be crazy for financial advisors when I say this, but it never dawned on me, Michael, never dawned on me.

If somebody said to you today, "I'm going to pay you 10X cash flow for your planning practice." You might go, "Wow, that's crazy. How are you going to make your money back?" That's the question we ask all the time: "How are you going to make your money back?" And what I didn't ever really think about is the word arbitrage, meaning that a private equity company that has substantially more revenue or substantially higher amount of assets would trade at a higher multiple than my individual practice. And it seems simple as I'm saying it now, but most advisors, they don't think about it that way. They buy another advisor's practice, they go, "I wonder if I could make my cashflow back in 3-and-a-half years if I do this and that."

These companies don't think that way. So, the multiple, which I can't disclose on here, let's just say it was substantially higher than a 3X on revenue, was the most significant transaction I ever made in my life, ever. It was life-changing, not-have-to-work-again type transaction. And it opened up my eyes in thinking, "Geez, I thought I was a reasonably smart guy, but maybe there's a lot of this I really don't understand." And I started thinking, Michael, "If I don't understand it, I wonder how many people in this industry do understand it." And that's how that whole thing went down. And I sold on July 1st, 2019.

Michael: All right. So, a couple things I want to understand here. First, the nature of these are arbitrage… I just want to make sure we're clear for people who are listening. So, this is the idea of a PE firm might come in and say, "I'll buy your firm at 10 times cash flow because you're generating X dollars of profit." So, I guess, can I ask, what revenues and profits or what revenues and margins looked for you guys at the point you were selling?

Ted: We were in the 40% range on margins, but a lot of people will run 50% on their practice. But let's just say to keep this simple, that you were doing $10 million of revenue and you were doing $4 million of profit, 40%. On $4 million of profit, if you got paid 12 times cash flow, it would be $48 million. And it's not going to be $48 million at close, there are definitely some bells and whistles and hooks to it, but nothing that's that crazy in general. And I started thinking, "You pay me $48 million, how the hell do you make back your money?"

But if I'm a firm with $2 billion, let's say, and the firm that's buying me has $20 billion, their multiple, if they resold, might be at 18 times cashflow already. A good example of this, Michael, is that recently, CI, which is a big firm in our industry, I think Bain & Company, and this was in Citywire. They took out 20% of CI and the multiple, which was published, was at 25.6 on EBITDA, 25.6 on EBITDA. So, if you buy me for 12 and you're able to go resell at 25.6, are you really worried about...

Michael: Yeah, you literally doubled your money without growing the thing you bought at all, literally just because someone else would pay more for a bigger thing.

Ted: That is what advisors need to get into their head, that is the world that we're in today. Goldman just sold their business to Creative Planning. Well, I don't think the multiples were published, and I'm sure Goldman got a good multiple, but I'm 100% sure that there was some delta between Creative's multiple and Goldman's multiple. It had to be that way, that's why they acquired them. And whether Creative resells down the road or they go public, I have no idea. But I will say that there was some arbitrage in that multiple, no question about it.

Michael: So, indirectly to me, this also helps highlight just the sheer impact that margins have. You noted you were running at 40% margins. And I have seen other firms that are there even a little bit higher, but if you look at InvestmentNews benchmarking studies and such, most firms at size are still running 25% to 35-ish% margins. The average is more like 30 or really high 20s. And some are even a little bit lower than that. So, if you're running at 22% margins, 10 times cash flow is, in your example, that's $2.2-million of profit, that's a $22 million valuation on $10-million of revenue. So you're getting about 2.2 times revenue. If you're running a $4-million profit and you're getting 10X earnings, you're getting a $40-million valuation or 4X revenue.

And so, when the deal at the end of the day gets struck on profits, because that's really how it gets done, we talk about revenue as a shorthand, but people buy cash flows and financial buyers by cash flows. To me, that's the other thing that, I think, often doesn't get understood and appreciated a lot when you see headlines of, "Wow, that firm got bought for more than 3X revenue." Well, actually, that may just be because they were running 35% profit margins, and that's what "drove up" their multiple because the reality is they got the exact same multiple free cash flow a lot of others are getting.

But if you literally have a higher profit margin, then when you multiply it times your profits, it's a much bigger multiple in revenue.

Ted: Yeah. And I'll give you a couple quick insights on my deal that I can talk about that I think are interesting in general. First of all, the advisors that are out there that are like, "I run a 80% margin because I work out of my house and I do a million of gross and I make 800 grand a year." That's a great business for you, but nobody's going to buy it in this sense that when you want to sell them the $800,000 of cashflow, you actually have to hire somebody to work in the business. And so, a lot of those advisors are unrealistic about what they're building. Number 2, my...

Michael: Just to be fair, someone will buy that. It is a good amount of free cash flow, but just you're not getting valued on your 800 net...

Ted: No way.

Michael: ...because the buyer doesn't get that net because the buyer's got to hire someone else to do your job, which means they're, granted, not the worst in the world. They're 'only' going to net 500 or 600, but they're going to value you on the 500 to 600 net they think they can do not the 800 you're taking home. Because really, part of that is your profits and part of that is just the salary you didn't bother to pay yourself because who cares when it's your business? But buyers do that math.

Ted: My biggest fear doing the deal, and some people may feel this way, is when they said, "Well, you gotta become an employee." And I thought, "Gulp. Am I going to have to wear a tie to work again? Am I going to have one-on-ones every week to talk about what I did this week? Am I going to have to report a whole bunch of numbers?" And it really freaked me out. It was probably the one thing that I thought, "Maybe I'm not going to do this because I don't want to work for anybody again." But what I've realized into this thing is that these financial buyers, they don't want to run your business. They want to give you money to pour gas on what you're good at. And they want to poke and prod you like a doctor to figure out where it hurts and give you solutions to solve those problems.

And at most, Michael, I had a once-a-month call to go through my financials to see how we were doing, and that was about it. Nobody was talking to me about my wealth management strategies or other things like that unless I wanted to talk about it. So, that was that was a big "aha" for me because I was freaked out about that, man.

Transitioning From Owner To Stay On As An 'Employee' [39:44]

Michael: Help me understand. I thought the whole queue up of the transaction, the first place, was you wanted out. So, why'd you take an employee deal, versus like, "Hey, guys, I'm so glad you want to buy my business. Here, take it." Peace out.

Ted: Let me explain this to everyone. And Michael, since you're the financial genius, you'll understand this better than anybody. If you want to sell your business and get out tomorrow, you're going to do it at a discounted valuation. So, if you say that your business is worth $10 million and you want out today, I'm making this up, but somebody might pay you $7 million because they got risk. If you believe that you're good at what you do and you can grow it, when you negotiate a deal, and this is the one thing I did that was smart, you can negotiate air in the hot air balloon. And here's what I mean by that. I could say to somebody, which is what I did in this case with Blue Spring, is I said, "Look, I think I can grow this thing."

They said, "Well, why don't you stick around for 3 years, make a full transition of all the clients that you don't want to work with anymore? We'll free you up to do all the marketing, and that's all that you'll have to worry about doing. And if you can grow at a CAGR level, compounded annual growth rate, of 5% a year, compounded, irrespective of the markets, make the markets neutral, we'll pay you this much more. If you can do it 10%, this much more. But if you can grow by 20% and basically ring the bell, we'll pay you a lot of money." And I thought, "You know what, I'm a great marketer. If you free me up from this other stuff, I can totally ring that bell."

And that's why I stuck around for 3 years after I sold as an employee because if I rang the bell, it meant even more money for me at the end.

Michael: And then you're out-out with a bigger check having done a post-transaction surge. And so, I'm presuming then the payment... Well, obviously, the payments get bigger if you grow at like 10 instead of 5 because literally, compounding 10 is more money. But was it literally the multiple on that growth was better?

Ted: Yes.

Michael: You don't just get more money because it's bigger, you get a better multiple on that money...

Ted: That's exactly right.

Michael: ... if you make that growth as well.

Ted: That's exactly right. And I tell you something, I'm 9 months into this deal, Michael, and you know what hits us in March of 2020? COVID.

Michael: I was going to say, you sold this in, you said July 1st, 2019. The world looks very different...

Ted: 9 months later...

Michael: ... 9 to 12 months later.

Ted: COVID hits, the market goes down in that month something like 35%. I go home and I cry. Literally, I don't remember the last time I cried, and I cried and I thought, "What did I do? I don't care how good I do, I'm not going to be able to recover from a 35% market hit. And it's probably not going to rebound anytime fast." And obviously, I'm going to say I got charmed lucky that it rebounded like it did. But that's the risk that you take when you get into these things, because you can't get a deal in general, you go, "Well, protect me on the downside," meaning if the market goes down by 20%, I want to be protected, but I want the upside if the market goes up by 20%. You can't have your cake and eat it too.

Michael: So, with the growth targets that you had to hit, can you grow a 20% compound growth rate for 3 years, was that just on the overall assets and revenue base? Was that specifically...

Ted: It was all EBITDA. It was all EBITDA-driven. It was all EBITDA-driven.

Michael: It was grow the EBITDA. So, you could make this from markets or from organic growth, but in the classic sense that we all live with advisory firms, there's nothing that sucks more than having to pay 100% of your salaries while the market tanks because it obliterates your earnings because all the market drop comes straight out of the bottom line because your staff still has to get paid when you're going through a bear market.

Ted: Yeah, that's exactly right. And as you said it, all these buyers end up being financial buyers one way or the other. So they really all look at cash flow, which is why... Listen, anybody that's listening to this, if you don't have a clean set of books and you can't produce them quickly and you can't do what's called to-be-redacted financials, meaning you can't quickly put your add-backs back into the business, you ought to clean it up today. I don't care if you're not ready to sell for 15 years, because you're going to have to put that together. And the cleaner that stuff looks, the faster a deal will go.

Michael: Wait, so can you explain that for folks that are not familiar?

Ted: So, let's say somebody on here is doing $2 million of revenue, and at least today, you say you make a million dollars, but the tax returns that you send to the government say you make a half-million dollars. You're going to have to explain that. Some people have a set of books and they bury their Lamborghini, they put their kids on payroll, their partner or spouses on payroll, they put the sporting tickets. And some of those things may be true business expenses, I'm not going to say that people on here put untrue business expenses, Michael, in their P&L, but I'm betting they do. And eventually, you're going to have to explain that because a buyer wants to buy cash flow. So, if you're doing your financial...

Michael: You get this problem where you take things like, I'm running my car through the business for tax purposes, but I'm not really reflecting that way in my business profitability because I know it's my car. And so, you get these gaps between what you're claiming the profitability of the firm is and what you're telling Uncle Sam. And so, any financial buyer is going to come in and say, "These numbers don't match. Can you explain and reconcile these numbers?"

Ted: Yeah. So, my recommendation is whether you're using a professional service or you're doing QuickBooks yourself, or FreshBooks, or whatever it is, run your books the way you're running it, but also at the end of the year, try to do a set of what I call to-be-redacted financials or whatever you want to call it, try to put the add-backs of what they really are so you can figure out what the true cash flow is in the business. Because financial buyers are reasonable, you can explain some things away, and some things you may not be able to no matter how hard you try. So, just realize that when you sell it, you're going to have to prove it.

Michael: And so, this is classically the stuff people route through their business that maybe they're doing a little bit more for tax purposes than bonafide business. So, family member comp I generously put through the business, the cars, the occasional sports tickets that are mostly "entertainment," that kind of stuff is what you're talking about?

Ted: Yeah. Most advisors put all their travel, period, in the business. A lot of them do. I'm not saying all but a lot do, all your meals and entertainment. And in the end, when a buyer says, "Oh, wow, you got $30,000 a year, Michael, in meals in entertainment." It's like, "No, no, it's not that way. I put my family stuff on there." "Well, which part was your family stuff and which part is the stuff that actually relates to clients, because I got to know what I'm buying? I got to know what I'm buying."

Michael: Which I guess in the advisor context, this generally is going to get you better results because you're going to start backing expenses out of the business that probably shouldn't be there and actually show better profitability, which is good when you're getting bought on a multiple of profits or multiple of earnings.

Ted: Yeah. And I will say that most buyers, and this is including the one that I went through, we've always heard this story, like, you need 5 years of financials, which is not true at all. Most financial buyers right now would want to see last year and this year. And what happened prior to that is not that relevant unless you're really proving out how fast you've grown top-line revenue, like you have a marketing engine that grows top-line revenue. Last year and this year is mostly what matters.

Michael: Because they're just trying to understand where your profitability is, because the irony is they may not necessarily need you to grow all that much because they're making a lot of their money on the multiple, the size, multiple arbitrage, not actually your growth. They do need the profitability, but they're not as reliant on growing the profitability because they're trying to make their money on the multiple arbitrage.

Ted: Yeah. And if you're fee-based and let's say you're billing quarterly, your business is only as good as like last quarter's billables. If you annualized it out, you could look at the last trailing 12 months, which is last 4 quarters, which could rise and fall with the market, but to a degree, the last quarter of billings, if you annualize it out, is where your business is, right?

Michael: Right. So, is that ultimately just how the transaction went? You cut the deal, you had a 3-year hang around, grow earnings 20% a year for 3 years, shift all the clients off of you so you can free up your time to do that, and then summer of 2022, you'll hit the 3-year mark and you're free?

Ted: Ride off into the sunset, baby.

Michael: And so, is that how it played out in practice?

Ted: Yeah, it did. They asked me to do a little bit of consulting work after, which I did with the team just to make sure everything was massaging right. Obviously, I care and still care about the brand. It's something reputable I built here in Atlanta. But what it really allowed me to do is basically drop my licenses and the things that you were mentioning earlier, getting involved in different kinds of things, that given my licenses and the conflict of interest I might've had in dealing with clients personally and running the firm professionally, I didn't have to worry about it anymore so I could start to do other things.

Starting JPTD Partners As A Consultant For Selling Advisory Firm Owners [49:56]

Michael: So, what became some of the other things?

Ted: Well, here's the craziest part about this. Some people who are listening might've seen the movie, "Jerry Maguire," "Show me the money!" And I had a friend of mine that in a lot of cities and even professionally, we have what I would call to be "coopetition", people that you compete with, but you're still friendly. And I had a friend of mine that was in downtown Alpharetta, Georgia, and he had heard that I did a transaction, and I met with him and he said, "Hey man." He's like, "Do you think you could help me do this?" And I was like, "I don't have any idea, I just kind of figured it out for myself." And I actually started to help him figure out and consult him on how to do one of these transactions.

And I ended up helping him get a transaction, not with the firm that I went with, but he did it with another firm. And this thing, Michael, just kind of morphed into a full, I don't want to say a full-time job, but a job starting to be a "Jerry Maguire," a consultant to help advisors figure out the landscape and be able to maximize the deal that best suited their practice, almost like a fiduciary for financial advisors for selling their practices.

Michael: And so, that's now become the focus, you've gone from "sold my firm" to deal consultant for other advisors selling their firms?

Ted: Well, I'm an entrepreneur, so I'm doing a lot of things, but that has become a really cool focus because for me, remember what I said, I don't want to manage people, so I don't really have to manage people doing that. I don't have any clients that I have to serve per se except the ones that I'm helping. Once I'm done with the transaction, I have nothing...

Michael: Once you're done with the transaction, they move on. You don't have to keep serving them for the next 10, 20, 30 years.

Ted: Yeah. I'm not sitting down every quarter talking about their tomato garden and the markets. So, I don't have to do that anymore. And over the course of the last few years, I've been involved or looked at probably 60 different firms' deals. And so, I almost feel like, Michael, now that I'm a human Zillow when it comes to the, what's a financial advisor's practice worth? That's just the way I would describe it because I've seen so many of these that they're not all bake the cake the same way, but there's many, many firms that are in the business of acquisition.

Michael: All right. So, what's the consulting business now? So, people can go, it's like, "What's this called?"

Ted: It's real simple. It looks like a real estate agent. That's the easiest way to explain it. I list your home and we make a success fee if we sell the home successfully. If we don't sell it, we make nothing, no retainers, no hourly rates. I don't need the money per se, so I'd rather bet on helping you get the best deal for your practice. And we get the most upside if we can sell it for the most amount of money, assuming the culture fit makes sense.

Michael: And how does that work in practice? Like that means there's basically a percentage of the value that gets struck as a success fee?

Ted: You're asking a very important question because when you look at a deal, you'll hear these terms like an all-in offer, "The all-in offer was X." But what we get paid for is the consideration for the business. Meaning, if your business does $2-million of revenue and somebody says, "I'll buy the business for $10-million," to keep this simple, we're getting paid on the $10-million. But if you choose to stay, which a lot of people do, there may be ongoing compensation or stock or another bite of the apple or retirement packages. We're not making money on that, we're getting paid to basically sell the house. And that's what we do.

Michael: Okay. So, if I end up with, well, I'm going to get $12 million out of this deal because I'm selling it for $10 million, but then I get a $250,000 continuation contract for the next 8 years because I'm 57 and I want to be out at 65, you're not getting paid on the 12 which has like 8 years of comp afterward, you're getting paid on the check that's getting written for the enterprise.

Ted: That's right.

Michael: And can I ask, what is that percentage? How do you calculate that?

Ted: It ranges. In my world, I do this, and I take risks. So, a smaller practice could be on the higher end, it could be at 10%. A bigger practice could be lower. I don't think I've ever done a deal for less than 4%.

Michael: Okay. And just in your world, what is smaller practice? What is bigger practice? That's like a $50 million firm and a $500 million firm? That's like a billion-dollar firm and a $10-billion firm?

Ted: Small practice is anything sub-$1-million of revenue. If you're between $100 million and a billion, that's a really good practice to sell. There's a lot of appetite for that. At the billion-dollar level where we were and where other firms are, it becomes a more sophisticated game. And the fees may be less, but it's just a more sophisticated game. There's not that many billion-dollar firms that are out there. There's a lot of firms between $100 million and a billion.

Michael: Okay. Sounds like that's the sweet spot where you tend to live, is that like, $100 million to a billion, so proverbial 1%, like I'm $1-to-$10-million-revenue enterprise.

Ted: That's a great, great, great practice. That's exactly what I'd say, $5 million of revenue is in that real sweet spot.

Michael: So then help us understand the role that you play or the services that you guys are providing. So, if I say like, "Ted, I got a $600 million practice, I'm doing about $4.5 million of top-line revenue. I think I want to be out," what do you do for me exactly?

Ted: So, if you think about it, everybody on here at some point that has a practice that's growing, or even if it's not growing that much, you're going to get some email from some private equity firm or somebody saying, "Hey, are you interested in selling your business?" Forget about advisor to advisor. And you may take a meeting or 2 and try to compare and contrast those deals, but you'll never really know you're getting the best deal because you don't have other advisors' deals to compare it against.

So, what I'm doing is that I think I've got 60 buyers now, and I'll look at those 60 buyers, and let's say Michael hires me on, we'll get you in front of, let's just say 10 buyers to start. Because the truth is, if it's not a culture fit, it doesn't matter how much money you're going to get for the practice, you've got to still think: is your firm a culture fit? Will it work for the employees in the company? Is this going to be good for your clients? And you also need to think about what things are non-negotiable. Some people don't want to give up their brand, some people don't want to give up the reins on asset management. And it's like, what things would you be willing to give up and what don't you want to give up?

And you also need to be thinking, do I want to sell all the firm and stick around? Do I want to just do a minority deal and de-risk and do something else down the road? These are all initial questions. So, Michael, we take on a client, we try to help them flesh through those questions. Think about an intake form that a financial planning client would take on, and we help build out that profile and then we go put them in front of, call it 10 buyers or so for a first date.

Michael: So, basically, you're sourcing all these introductions. You've got your own proverbial Rolodex of firms that are buyers that would be interested in a firm at your size, at least are a decent shot at being a reasonable fit, so it's worth the first conversation, first introduction. And those are all introductions you guys facilitate.

Ted: We make it, we go on the first meetings with the client. We're on every meeting with the client, in fact. And then what we do, and some people that are financial planning for business owners will understand the term a Q of E report, a quality of earnings report, and we'll go through and look at the financials, and our team will help build a set of redacted financials with the add-backs if the advisor hasn't done it already, which most of them have not. Some of them don't have books altogether. And so, we've got to construct those because every buyer's going to want to see a set of books. So, we got to get the books cleaned up, get them in good shape. And then once we have the meeting and the NDAs in place with the buyers, we're going to go give them a set of financials.

And sometimes we put together what's called to be a CIM, a confidential information memorandum. Think about it like a 10-page, "Here's the great stuff about the practice and what you're buying." And you may have seen this for business owners if you've ever had a client as a business owner or sold before. And a lot of times the advisors will want to learn more about some firms than the others. And there may be meetings with their investment committees or their financial planning departments, or taking a look at the tech stacks to see what will integrate and what won't. And then hopefully if all that's productive, we get to what's called to be an IOI or an LOI, an indication of interest or a letter of interest.

And from there, I say, "Let the games begin." Because we know the marketplace, we try to negotiate the air in the balloon. Number 1, the consideration, Michael. Number 2, what the ongoing compensation will look like for the advisor predicated on how long they want to stay. And if they're going to stay a little bit longer, we like to negotiate another bite of the apple. And we get paid to try to negotiate that deal so we can get our clients the very best deal for their firm.

Michael: So, I think for most folks, the consideration, I get paid when I sell is pretty straightforward… ongoing compensation for the advisor if I stay, I understand. Can you explain more like, what is another bite at the apple mean…?

Ted: So, that can work in a number of ways. One example is that some of these firms have their own private stock. And one deal, what we negotiated is we said, "Look, the advisor is going to get paid a certain amount of compensation around the practice, but what's the real incentive for the advisor to grow EBITDA if it's not in the consideration of the deal?" Not that much. So, we might say, "Look, if the EBITDA of the business is $2 million and the advisor over 5 years grows it to $3 million, we want another slug of stock in the private equity company." That would be an example.

A different example is we negotiated one deal where we said, "If the advisor works for 5 years, we want a 5-year retirement package of 50% of their W-2 income." Meaning that if the W-2 income they started with was a half million, Michael, and it grew to a million dollars after 5 years, they would get a 5-year exit pension, if you will, or payments of 500 grand a year because that's 50% of a million for having grown the value of the business. That's an example of a second bite of the apple.

Michael: So, how big is your team?

Ted: So, right now we've got 9 people on the team. There are 4 other very seasoned 30-year-plus financial executives that are on the team that have been in and around the block a long time. There are analysts on the team because remember, we have to run these financial reports, we've got to do research. We're constantly interviewing new partners that we think could be fit for our clients. Obviously, some people may only want a fee-only partner and if they can't use the term fee-only, they're not going to want to go with them. And some people are going to want to deal with certain brand names that we see in Barron's Lists all the time, and we deal with a bunch of those companies. And there are some buyers out there...

You might have mentioned this in the beginning, but I'll give you a good example. Not many people may have heard of the Pegula family and they own the Buffalo Bills and the Buffalo Sabres. And a lot of these wealthy families are creating family offices that invest in a number of things, but as a capital partner, a bunch of them are getting into the financial services business. So, sometimes they end up just being capital partners and not really the RIA per se, or how we think about it. But we're constantly looking for where the capital is, Michael, because here's what a lot of advisors don't understand. It's not just about the firm.

There's also, the reason we're so good at what we do is that we follow the money. When a firm, Stone Point Capital gives a firm $250 million, or Bain invests $400 million, well, that company's got to do something with that $400 million. So, they may be more apt irrespective of interest rates to dial up the multiple because they want to put the capital work. That's not things that advisors think about every day, and it's not things that they're following.

Michael: And what's the business called? I don't think we've actually...

Ted: Oh, the business is called...well, it's not really a great name like oXYGen. That was a good one. But it's called J-P as in Paul, T-D Partners, JPTD Partners.

Michael: You're going to rename that?

Ted: Yeah, I probably will. I probably will at some point. Here's the funny thing, this wasn't supposed to be a business, it was just something that was going to be like a little hobby, but I think I don't know how to do hobby. I really don't. I'm like you, you're never going to settle down. It just kind of the way we're built. So, am I going to have to rename it? Yeah, I'm going to have to rename it. It's not a great name.

Michael: It just doesn't roll off the tongue well. So, I guess for folks who missed that, this is episode 364, so if you go to kitces.com/364, we'll have a link out to JPTD Partners. It's like the letters don't roll off the tongue well.

Ted: No, no, it's not a branding name, Michael.

Michael: JPTD.

Ted: Yeah. But it wasn't built for that. Now, I think we represent somewhere in the nature of 115 advisors right now.

Michael: In like various deal stages?

Ted: Yeah.

Michael: That's a lot of active deals.

Ted: It's insane. I don't know how many firms even have a specialty to do that. We don't do anything else but that, Michael. That's all we do. I think it's a really unique thing in our business because as you mentioned, it's scary, man. You built your whole life doing this and you might not do it again. You could, but it's a real bear to go build a financial advisory wealth management practice. I'm not saying don't sell to your friend down the block, you can do it if you feel like that's what's best for your clients, you're just never going to command the highest multiples for it. Never.

Understanding Valuations And Buy-Out Deals For Advisory Firms [1:05:59]

Michael: So, then share with us more just as you're doing this now huge volume of deals, you had said earlier, there's all these questions that advisors don't even know to ask. What are you learning that advisors need to know and hear about and be aware of and how this works?

Ted: Let's be clear, and you kind of hinted around this in the beginning, every firm may have a different way that they value the business. So, you want to be asking, are you valuing my business on revenue? Some of them, Michael, will value it on the term EBOC. And really what I think about is if you don't pay yourself a salary, which there are a lot of advisors on their P&Ls, Michael, that don't pay themselves much of a salary, maybe enough to suffice the IRS if they do that at all. And then that's kind of the cash flow to the owner in the business.

And then there's EBITDA, and every firm has a slightly different way that they calculate EBITDA. They may say, "In the P&L, we're going to demand that you put in a $250,000 salary for a senior partner, and that's going to help us get to EBITDA." They're going to say, "We have all these platform costs at our firm to run technology, etc., etc. And no matter what your P&L is, we need to bake those in there to get to EBITDA." So, in the end, you need to be clear about what exactly it is that you're selling because somebody could tell you, "I'm going to pay you a multiple of 8," and somebody says, "I'll pay you a multiple of 10." But it really doesn't matter unless you know what number it is that the multiple is being paid on.

Michael: Because the first firm says, "I'll pay you 8X your earnings." The second firm says, "I'll pay you 10X your earnings. Oh, but by the way, we're going to be doing some adjustments to your earnings before we do that. We're going to be tagging in different salaries for the partners and we're going to require you to take on some costs for tech that we use that you're going to be required to use." And when we get through all of that 10X, your adjusted earnings number is certainly not 10X whatever you were looking at as your earnings. And ironically, it might not even be as high as the other firm that was willing to pay 8X, but they were paying 8X what you actually have on your P&L.

Ted: Yeah, that's right. And when these deals are done...this gets to the next question, most of the companies don't really want to do an all-cash deal. I'll tell people that upfront. If you're doing a full deal, a lot of them want you to take stock in their company. And so, you want to be asking questions like, number 1, does the stock pay dividends or does it not? Some of these companies, the stocks will pay dividends and some don't. On mine, when I did mine, Michael, it didn't pay dividends, but then Warburg Pincus, Bluespring Wealth Partners made a 1-time massive dividend distribution. That was a win. Some of them do pay ongoing dividends.

2, you may ask, and you should ask, how do I get liquidity? Because a lot of the deal decks that they'll show you will say, "Our stock has grown at a 30% CAGR over the last 5 years. If you take 20% in stock, you're going to have $8 million in 5 years." It's like, "Well, that all looks good on paper, but how do I get liquid?" And in some cases, it can be very, very difficult to get liquid. And in some cases, you can only get liquid when they do a recapitalization or another equity partner takes a position. Or they may tell you, "We're making a run to go public", and that may or may not happen. So, these are important questions to ask because everything looks good on a PowerPoint until you actually have to figure out a way to get your dollars out. So, that's a good inflection point or questions you want to be asking.

Michael: So, what else? Just, this is great.

Ted: Okay. The earnout is important, no one's going to pay you 100% cash at close. That's just my view, and I've seen a lot of these. So, the question is, what does the earnout look like? Some earnouts, Michael, are predicated on revenue retention and never on the client list, it's revenue retention. And then the question is, well, is it 100% of revenue retention? Is it 90%? And then, what do I lose if I don't hit it? Meaning, some companies, you lose part of the payment, some companies go back to the full purchase price and then they do a reduction of that payment based upon the full purchase price.

So, you really need to ask that if I don't hit the numbers, what am I really losing, and how's that number calculated? And if I hit way above it, do I get something more? And if they give you CAGR numbers, what are the CAGR numbers or the CAGR hurdles based upon? Because to get paid a higher multiple, a lot of times you're going to have to hit some growth hurdles. And is that predicated on revenue? Is it on EBOC or EBITDA? These are good examples of questions that you want to ask. If you're getting paid ongoing compensation, is it a payout? And is the payout different on legacy business than it is on new business?

If it's a salary plus bonus, is the bonus a flat bonus? Is the bonus based upon EBITDA? Do you participate in that? Or is it on a growth of EBITDA? These are the kind of questions you want to be asking when you start constructing a deal.

Michael: And in practice, how negotiable are these? Can I move a bunch of these levers if I don't like them? Or is it more of, this is how firm A does it and firm B does it differently, but if you like a certain deal structure, you're probably just going to have to go with B because that's just not how A does their stuff?

Ted: So, I'd like to say at the get-go that everything's negotiable, but it's kind of hard to know what you're levering up against and negotiate if you've never seen anything else. So, imagine a firm's offers, Michael, 10 times cash flow and you're like, "Well, I wonder if I can get 11." And you go, "Well, how about 11 times cash flow?" And they go, "Okay, but you got to sign the LOI now, you're exclusive with us, and then you're done." And you sign it, and then Ted comes along and goes, "Well, I just did 1 like you and it was at 13." You could have gotten up to 13, you just didn't know what the market was like because there's no MLS listing that shows what all these practices sold for.

And that's the power of doing more of these deals and seeing more of them is that you know where the marketplace is. A lot of advisors that are self-negotiating just don't know where the market is. But everything's negotiable.

Michael: So, I'm cognizant in what I'm about to ask you, we're running this podcast at a point of time, so this may even be dated from when we record until when it goes live as markets move as they do. But just as you're seeing all these deals and doing whatever, like 100-plus negotiations, can you help anchor us? Where is the market now? What should we be expecting for valuations and upfront payments versus earnouts and whatever some of the common levers are? Can you help ground those numbers or range, whatever it is?

Ted: I can answer it, and I'm going to answer this also saying that I'm not a believer as it stands today that interest rates are really a big factor today. What would make this market go worse, Michael, is if capital dried up. But I believe there's a lot of capital still out there, so I don't think it's going to dry up tomorrow. If capital dried up and interest rates were higher, it would be harder.

So, here's the 10,000-foot view for people. Anybody who's a pure RIA, you're the most valuable. If you're a fee-based advisor and you still do some annuity tickets and other brokerage-type business, if it gets to be more than 20% of your book, you're a lot harder to sell and a lot less valuable. And if you're like a main commission, annuity person, really none of these companies hardly will touch you. It's very few.

Michael: So, why is RIA the most valuable, or at least as compared to fee-based advisors or brokerage firms who might be doing substantively the same fees on substantially…?

Ted: Super easy to transfer. It's either negative consent or positive consent in most cases. And you know better than anybody, the number of custodians that are out there are smaller and smaller, not that many of them. And a lot of these firms really believe that Wall Street believes that the pure fee-based revenue will continue to be the most valuable form of revenue for a long time. And they want to buy that. And so, if you have all your money at, well, I guess Schwab, TD together now, Fidelity, and it's super easy and you have your own ADV, they love that business. They love that business.

Michael: So, it's not even just being under the corporate RIA of my broker-dealer and a hybrid environment, you're talking about folks that own their own outside RIA?

Ted: Yeah. I mean, if you're 100% fee-based under a corporate RIA, it's not terrible, although it's a little bit more challenging than somebody that owns their own RIA at Schwab, as an example. But I would say that I would never sell my business for less than 4 times revenue. And when I look at the marketplace today...and if you're bigger, it could be 6 to 7 times revenue. It's that big. If you want to use a cash flow...

Michael: I was saying like, is this driving off revenue or this is because of the multiple, the capital of high markets specifically?

Ted: No. I'm trying to keep it simple for people. If we went down to EBITDA, I'm usually no less than 8 times on EBITDA, but I had one last week that was at 14 times EBITDA.

Michael: Okay. And what drives the EBITDA multiple?

Ted: Size.

Michael: And is that like the only thing? like, forget all the other, like "I'm making my technology more efficient and all that, just size is my driver"?

Ted: Nobody cares.

Michael: You hurt my heart here, really.

Ted: Here's what matters...

Michael: All the stuff we do of like, "I'm doing all this stuff to systematize my firm and I put a new CRM in place," that's not actually driving outcomes.

Ted: It's cliche, but size matters. Your new marketing engine matters because there's value in you being able to have a provable, scalable model that you can bring in new money on a regular basis. That's valuable to firms. Having a G2 is valuable to firms. Definitely being systemic...

Michael: Even if they're not buying from you, the fact that they're there and they continue after…

Ted: Yeah, that's right. That's correct. It gives them safety and security for the asset that they're buying. The fact that you have systematized processes and systems is important. It's not going to really add another turn to your multiple. Let me not break everybody's heart on here, Michael, but the way that you manage money does not matter. It will not increase your multiple, it will not make a difference at all when you sell your business. So, if you think you're really good at it, great. If you think it's going to make you worth a lot more when you're like, "I'm really good and I outperform the market," nobody cares in that world. They don't.

Michael: So, size, just raw size, your marketing engine, so how the firm brings in money, I guess, particularly if you're not still there, and the advisors behind you that can retain the clients after you're gone?

Ted: Yeah. Again, I don't want to break everybody's heart, but listen, Michael, I thought I built a great brand with oXYGen, I really do. I thought I had a really great idea back in 2007 and when I started it in '08, and XY and nobody was doing it and I had oXYGen machines and I had all this cool stuff. And even when I did mine, I'm like, "Well, what's the value of the goodwill on my brand?" And in the end, it was really the engine that broadened all the assets that was valuable, not the brand itself.

Navigating Marketing Growth Rates [1:18:34]

Michael: And in the context of things like size and marketing, are there size thresholds that matter? Are there certain growth rates, like organic growth rates you have to hit and sustain for that to be interesting premium growth versus normal growth or premium size versus normal size?

Ted: Yeah. In general, anything that's at a 10% CAGR on top-line revenue is important. If you can grow at 20, it's more sexy obviously than it is at 10. That matters...

Michael: And that's top-line revenue of everything, that could be including markets?

Ted: Yeah. That could be including the market, but that's really important to these firms. What's kind of funny in this process, and I had it anticipated, if you... Let me tell you the death bomb here. Here's the death bomb. Your employees, the people that work for you are a 1099. So, I ask an advisor, "How much revenue do you do?" "I do $2 million." "Okay, well, break it down for me in the practice." "Well, Tom manages $100 million, Bill manages $100 million." "Are they W-2 or 1099?" "Well, they're 1099." "Who owns the clients?" "I do." "Where does it say that? Where does it say you own the clients? When Tom leaves the firm tomorrow and all those clients go with him, how will you hold them accountable?"

Michael: Because just in practice, if they're W-2, you can have an employment agreement, you can have non-solicit, you have like IP work product provisions that protect the business. When they're 1099, if they just leave, set up shop across the street, and start calling the clients, you probably don't have any way to stop them.

Ted: Yeah. Even worse, Michael, let me add 1 layer to this. You get an OSJ, it's Cornerstone Wealth Management and they got 18 people on the firm, and they look great on the website, but 8 of the advisors in the firm are all their own 1099s, the OSJ takes a small haircut of let's say 10%, that business isn't valuable at all. How are you going to sell that? They're like, "Well, we're a Cornerstone Wealth Management. We're all going to sell." No, you're not. I've been through this so many times already. You're not going to get everybody to get up on a pedestal and go sell at the same time. You're just not. So, unless you build a really solid legal structure, your override is kind of not valuable at all. It just isn't.

Michael: And size thresholds, are there thresholds? Are there break points where the multiples start moving?

Ted: Yes. If you are truly at a million of cash flow, it will move.

Michael: Meaning revenue or meaning profits?

Ted: No, no, no. I mean cash flow like EBITDA.

Michael: Okay.

Ted: Million of revenue helps, but honestly, a lot of these firms don't want to buy like $400,000 of cash flow. They really don't.

Michael: Because they have much stinking money to deploy, they want to buy bigger deals at a time.

Ted: Yeah. And it takes as much work as it does to do a $400,000 deal, and then to do a million dollar deal, but a million and then $5 million, I would say are like those real thresholds.

Michael: Okay, $5 million of earnings?

Ted: Yeah.

Michael: And so, I'm almost coming back to what you said earlier on multiples and I guess aside from size overall, your growth engine, and having the advisors for continuity behind you, it sounds like sheer margins are a huge driver because at the end of it, I could generate a million dollars of cash flow on $2 million of revenue or $4 million of revenue. I may get the same multiple on the cash flow, but if it took me half the revenue to get there, my earnings multiple has effectively doubled. I can get 4 times revenue because I'm getting 10X on a 40% margin, or 10X on a 20% margin. That's twice the business size.

Ted: Totally. And this is what separates the financial advisor from the business owner. Somebody who really runs the business like a business and somebody who's there like, "Hey man, I made 600 grand this year. I had a great year." And it's like, "Well, what were your margins?" "I don't know, I made 600 grand." That person is probably a good advisor and they're making a great living, but they're not considering the moves to make in the business to eventually sell it for the most value.

The Surprises And Low Points Ted Experienced On His Journey [1:22:59]

Michael: So, as you look back on, I guess all of this journey... Well, I guess at first, what surprises you the most as you look back on the journey of building your own firm? You were about 15 years in to get to $2-plus billion by the time the sale happened and you were done. So, what surprised you the most about the path of growing that business?

Ted: Well, I wish that I had been smarter to hire like a COO quicker or something like that, getting somebody in there who could really run operations because I wasn't good at running operations. It wasn't my strength and I should have outsourced that quicker. And a lot of times, we don't want to do that because we think we're going to give up control, but giving up control is what's necessary in order to be able to run the business. And I wish I had done that quicker.

Michael: So, you did ultimately hire a COO, it just came later in retrospect than you wish? When did you hire them?

Ted: I think at the point when we had probably, oh, it might've been 6 advisors or 7 advisors, that's really when I should've done it. When I was just starting to scale up, like needing more systems, processes, I was trying to do all that, I should have done it then.

Michael: So, what was the low point on this journey?

Ted: Probably the weeks that I would go home and I had 25 appointments, I had dinners at night because I was still doing my marketing and stuff like that, and just the dread of coming into the office every day thinking that I was going to have to see 5 meetings with people…

Michael: Even though you're like...and you're also doing like 10 media appearances a week, but that was totally fine?

Ted: Yeah. I love that stuff, dude. But I basically...just think about people that you care about their lives, you do care about their families, but you're coming into those meetings, and I can see why doctors sometimes don't even want to talk to you, because I was just like, "I just don't want to be here." And dude, that was a low-hollow feeling when you're making a 7-figure income.

Michael: So, as the deal queued up and the transaction got done, what do you know now you wish you'd known sort of before 4 years ago as you were negotiating this deal for the firm?

Ted: Well, I wish I knew where the multiples were in the marketplace. I think I could have negotiated a better deal. The biggest thing I have to tell you, which may sound weird or not, is that I took about 20% of my deal in stock. And in retrospect, I wish I took more. I wish I took more, Michael, because their stock has done phenomenally well, and I never really thought about the term velocity of cash. And I'll explain to you what I mean. Number 1, if you make a million dollars a year, just use simple advisor math, over the next 10 years, you're going to make $10 million. But you're going to pay ordinary taxes on that.

And if you've got $10 million in your pocket today, and you paid capital gains tax, who would have more money after 10 years? And then 2, the private equity stock will always go faster and harder than the stock of your company because they traded a higher multiple. You can't move your engine as fast as they can move their engine. And it never really dawned on me, Michael, to think about that, but that's why some people may want to do a minority deal because even if you swap stock, your stock can't grow as fast as a company that's bigger than yours. It won't.

Listen, Warburg Pincus is one of the biggest private equity firms in the United States. These guys are unbelievable in what they do.

Michael: For all the grief that some people give PE firms in the way they just try to make money on money, you feel different about that if you own some of their stock yourself…

Ted: I feel very different about it today.

Michael: …and watch how good they're at making money on money.

Advice For Advisors Looking To Sell Their Firms [1:27:08]

Michael: So, what advice would you give advisors that are 3 to 5 years out from selling and are thinking about, what does it take to put my firm in a good position for sale? As you sort of noted, it may not necessarily be upgrading your tech and adjusting a bunch of your systems.

Ted: Yeah. Build a marketing engine, make sure you have a consistent way to bring in new clients, and don't say, "I get referrals." That is not a marketing engine. 2, I would get your books super clean and be able to explain them like a real business owner. 3, I would make sure at least you have some succession plan in place, some G2 who could take over the book. And I really would advise, Michael, over time for people to think about getting out of the business of asset management and focusing on giving financial advice and the client service, and being an asset gatherer. I think that's a far better model if your idea is to scale to sell.

Michael: Interesting. So, giving financial advice while gathering assets as opposed to literally like my value proposition is hands-on managing, investment trading the assets.

Ted: Yep.

Michael: So, in that frame, it's still running an asset under management model, just your value is not portfolio management, your value is the financial advice attached to people whose portfolios you're attending.

Ted: Correct.

What Success Means To Ted [1:28:38]

Michael: So, as we wrap up, this is a podcast around success and just one of the themes that comes up is the word success means very different things to different people. And so, you certainly traveled the traditional path of business success, literally built an enterprise that sold for 10s of millions of dollars. So, you've lived the business success path. How do you define success for yourself at this point?

Ted: For me, today, my goal, my view has changed in a lot of the stuff. I plan to live in Atlanta and be in Atlanta. So, I think about creating a legacy for my children and a legacy for my community. So, I'm deeply involved in things in the city of Atlanta. Some of them are business-related, even financially related to try to make my city the best city to live in. So, I'm very focused on the city of Atlanta and my family. I wasn't around them all the time as I was building the business. It was tough, so my kids love me sometimes for it, and they hate me sometimes for it, but I'm doing everything I can to spend as much time with them as possible now.

Michael: Very cool. I love it. I love it. Well, thank you so much, Ted, for joining us on the "Financial Advisor Success" podcast.

Ted: Thank you.

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#FA Success Ep 364: Scaling Marketing To Sell A $2.2B Advisory Firm And Advising Advisors On The Lessons Learned From Selling, With Ted Jenkin

Executive Summary

Author: Michael Kitces

Resources Featured In This Episode:

Full Transcript:

Growing oXYGen Through Media Appearances And "Manufactured Celebrity" Approach [6:00]

Ted's Motivation For Selling oXYGen Financial [24:44]

Transitioning From Owner To Stay On As An 'Employee' [39:44]

Starting JPTD Partners As A Consultant For Selling Advisory Firm Owners [49:56]

Understanding Valuations And Buy-Out Deals For Advisory Firms [1:05:59]

Navigating Marketing Growth Rates [1:18:34]

The Surprises And Low Points Ted Experienced On His Journey [1:22:59]

Advice For Advisors Looking To Sell Their Firms [1:27:08]

What Success Means To Ted [1:28:38]

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Now Accepting Applications! Showcase What You Do Best At The 2025 Kitces Marketing Summit!

Executive Summary

Author: Michael Kitces

Resources Featured In This Episode:

Full Transcript:

Growing oXYGen Through Media Appearances And "Manufactured Celebrity" Approach [6:00]

Ted's Motivation For Selling oXYGen Financial [24:44]

Transitioning From Owner To Stay On As An 'Employee' [39:44]

Starting JPTD Partners As A Consultant For Selling Advisory Firm Owners [49:56]

Understanding Valuations And Buy-Out Deals For Advisory Firms [1:05:59]

Navigating Marketing Growth Rates [1:18:34]

The Surprises And Low Points Ted Experienced On His Journey [1:22:59]

Advice For Advisors Looking To Sell Their Firms [1:27:08]

What Success Means To Ted [1:28:38]

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