There are days when it feels like everybody wants to take over my business — and probably yours, too, if you are an entrepreneur or service provider who has achieved even moderate success.
I never take the incessant calls that get intercepted by administrative associates at Palisades Hudson Financial Group. Emails get dumped into my trash folder, unopened. Voicemail is deleted as soon as I hear “Hi Larry, I’m So-and-So with Voracious Capital Partners…”
I don’t respond to these inquiries because I simply have no interest in selling. But the inquiries are going to keep coming anyway.
I am in my late 60s, the founder and sole owner of a tax and financial planning firm that has $1.7 billion under management through our affiliate, Palisades Hudson Asset Management L.P. I am the sole owner of that affiliate, too. This makes me a prime target for larger firms, many of them backed by private equity, that see the business I started in 1992 as perfect for their “bolt-on” growth model. Such acquisitions are known as “roll-ups.”
For many aging business owners, selling to a roll-up makes economic sense, although they may end up feeling that they were just … rolled. The two outcomes are not mutually exclusive.
Some founders actively seek offers by listing their business with a broker. The flow of deals through that source is clearly not large or attractive enough to meet buyer demand, however, which is why I get more propositions than an attractive newcomer at a singles bar. (Do singles bars still exist? As I mentioned, I am in my 60s.)
The come-ons take various forms. Some are direct: We think your firm would be a great fit for our large, fast-growing organization. Some play on the fear that everything the owner has built may be lost: Have you made solid plans for succession? Some try to pretend that what is happening is not really happening (like when the newcomer gets invited home from the singles bar “for coffee”): We want to be your partner, and you can keep running your business as you always have, for as long as you like.
All these attempts at seduction share a blunt underlying message: Your business is worth more to us than it is to you. In purely financial terms, this is often true.
The first thing an acquirer of Palisades Hudson would do is fire all the senior non-client-facing staff who actually keep the place running. We have skilled, loyal managers who handle functions such as accounting, payroll, technology, editorial (which is how you are reading this article), facilities, marketing and human resources. If I sell, I expect they will all be gone before the ink on the contract is dry.
By the way, one of those employees is my wife Linda, our director of marketing and HR. Without Linda’s support, I could not have quit my job at a big accounting firm to start my own business. I could not have assembled the excellent staff we have built. In the early years, before we could pay that staff (or Linda), she spent evenings on the floor of our apartment applying mailing stickers to each issue of Sentinel, the printed forerunner of this online newsletter, which helped launch my practice.
My marriage would probably survive a sale of Palisades Hudson. But Linda’s job wouldn’t. A guy doesn’t stay married as long as I have by overlooking things like that.
Next, the acquirer will look at the financial planning managers and associates who handle a lot of work for our clients, such as drafting tax returns and portfolio rebalances. Perhaps an acquirer would cherry-pick the ones deemed most useful or promising, because competition for talent is fierce. But a buyer’s goal, more often than not, will be to fill existing spare capacity with the extra work that acquiring us would bring in.
The real reason I get all those unwanted calls and emails is our $1.7 billion of assets under management, or AUM. That is a big figure for a firm with fewer than 30 total employees. Buyers want our AUM, and maybe the roughly 10 or so senior advisers who serve the clients with those assets. They probably won’t want anyone else. They may not even want me, since I mainly run the company these days while our executives and managers take care of the clients. I consult on technical questions when needed, but that isn’t a major part of my job.
An acquirer would likely let me putter around the office for a few years if I insisted on doing so, but my salary would really be just a deduction from the selling price of my firm. Letting me hang around would be partly to reassure clients so they didn’t bolt, and possibly to encourage key relationship managers to stick around for the same reason. Mainly, though, it would be to assuage my ego and encourage me to sell in the first place. It would not even make financial sense for me. Profits from selling the business would get favorable tax treatment, unlike the supposed post-sale “salary” that actually came out of the selling price. In the buyer’s eyes, I should just take my money and go play golf or buy a boat.
Now we reach the crux of the reason why would-be buyers cannot get me to give them five minutes of my time. All businesses exist to provide value to their owners. Any good manager should seek to maximize that value. But private equity firms and founders can have very different ideas about what maximizing value means. Until they get on the same page, a sale is inconceivable and talking about it just wastes everybody’s time.
Like most people who quit their jobs to start their own businesses, money was not the only factor in my decision. Of course I needed to earn enough to support myself and my young family. My short-term goals were to be able to afford a comfortable minivan and a home in a good school district. My long-term goals were to build a business that could survive independently of me, creating value that I could pass to my family while providing everyone with opportunities to succeed, within the firm or outside it. Along the way, I appreciated the flexibility having my own firm offered to be present for my kids (no more commuting to Manhattan) and to build a sort of financial advisory practice that barely existed at the time — and is rare even today. Enterprises like mine are sometimes called “lifestyle businesses.” There may be something a little insulting in that term, but I have to acknowledge that it fits.
I gave up a partner-track job at what was then the world’s largest accounting firm, Arthur Andersen & Co., to become just Larry M. Elkin CPA, CFP®. When I opened my doors, I joked that I went from the world’s largest accounting firm to the world’s smallest. I could not have known that Arthur Andersen would implode a decade later amid fallout from the Enron scandal. What I did know was that partners there, and at similar firms, were pushed into retirement in their 50s and early 60s, forced to sell back their equity so their firms could make new partners. And I also knew that until I reached that age, I would need to work however and wherever the firm’s managing partners in Chicago decided I was most useful. If they wanted me to bring financial planning to Omaha, I would probably have to move to Omaha. (I have nothing against Omaha. Linda, however, would not have been pleased with that outcome.)
In dollar terms, quitting Andersen was a risky move. But assigning a real value to the “lifestyle” choices makes it economically rational. It turned out that I did not suffer financially either.
In private equity terms, lifestyle counts for virtually nothing — and that’s the right answer. Private equity seeks to maximize return on investment over a relatively short time horizon. When I started the future Palisades Hudson, I was in my 30s but looking ahead to my 60s and beyond. Private equity generally seeks to cash out of its positions in a decade or less.
Investors in private equity are often trying to diversify away from the stock market and its volatility. They take on debt that needs to be serviced, usually from cash flows from the business. Tax returns and investment management — the two biggest service lines at Palisades Hudson — provide relatively stable, recurring revenues. We build close, often multi-generation relationships with clients, who private equity buyers consider “sticky” and likely to stay with the business even if the founder departs. We have all those administrative functions that a buyer can roll up into the existing business doing the acquisition.
Lacking other alternatives, and also lacking economies of scale, a founder might sell a business for as little as two to four times EBITDA — a standard measure of cash flow that ignores interest, taxes, depreciation and amortization. Cutting redundant staff immediately increases cash flow, and thus EBITDA. Adding economies of scale can bring the business valuation (as part of the roll-up entity) to a much higher multiple, maybe 10 or 12 times cash flow or more. And using debt to buy the target business juices returns even further, assuming everything works out.
No wonder those private equity scouts keep calling, no matter how little interest I have in speaking with them.
A founder who lacks a strong internal succession plan is apt to find what private equity can offer very appealing. So might someone who has simply grown tired of running the business or servicing its customers, and who wants to move on to some other endeavor (even if it is just to play golf or sail on a boat). And so might someone who wants to capture and maximize the dollar value a lifetime of work has created, to provide a family legacy or support philanthropic causes, or both. Of course there is nothing wrong with any of this. I have always viewed money as just a tool, valuable mainly in the opportunities it provides to the person who has it, and most valuable when it is applied in the most rewarding way.
That said, most people I know do not make it their primary goal to die with the maximum possible net worth, or to earn the maximum they could conceivably get for a lifetime of toil. Founders of “lifestyle” businesses, in particular, often are following their passion or seeking to realize some vision they have of the future.
And so it was for me. When I went out on my own, “financial planning” was conducted by multiple parties, each in their own silo. A lawyer drafted your will. An accountant might prepare your taxes. A broker, typically rewarded by commission, guided your investment decisions. Your insurance agent, also commission-driven, offered to meet all your financial needs.
My time at Andersen exposed me to a market of successful people whose financial needs and questions overlapped all those areas and more, and which interacted with deeply personal matters such as how their work and wealth would affect their families. I thought they needed a single adviser with deep expertise across all those areas, including the non-financial matters. I sought to make myself that type of adviser, and as I attracted more clients, I sought to build and create a staff that would collectively be even better at it than I could be on my own.
And that is what those private equity buyers are trying to get, even if they don’t know it. They might not even know what to do with it if they got it. Our people master complex tax and cash flow planning, even as they evaluate complex estate plans (working with lawyers to implement them), manage artists and athletes’ business affairs, and plan and track that $1.7 billion AUM. There are roll-ups that operate in each of these areas, but not many that operate in all of them.
My plan is to have Palisades Hudson remain in my family’s ownership, operated by the longtime employees who have built their professional lives here, and potentially continuing with another generation of employees we are preparing behind them. Years ago, I established a management board on which Linda and our now-grown daughters (who have successful careers of their own) participate, so they can provide informed ownership while preserving our company’s culture and values.
Is a sale conceivable, at some future date, probably when I have left the scene? Sure. I think it is unwise to say “never,” let alone to try to preclude it from happening with strictures from beyond the grave (or wherever I happen to be). But I am not going anywhere anytime soon. I expect those private equity scouts will keep on calling, and I’ll just keep on disappointing them.
Editor's Note: Palisades Hudson's staff sometimes use AI tools in creating work for Sentinel and other company publications. We identify work created with AI assistance with a note such as this one for transparency. However, all of Palisades Hudson's articles receive a thorough review from a financial professional before publication to ensure clarity and accuracy. AI tools, when used, supplement our staff's existing expertise and are not meant to replace it.
