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March 2016

Lump Sum Economics


So, you win the lottery and are faced with a tough decision that goes something like this:

Do you take the lump sum here and now? Or do you take  a lifetime monthly payment that in its aggregate FAR exceeds the lump sum?

Easy answer , right?  Take the money and run is always good advice. Or is it?

We, at riaCapitalSolutions, analyzed the economics of “taking a check” as opposed to starting an RIA, using 5 years as our time frame. We can plug any time horizon into the algorithm obviously.

We all know that a well-run RIA will spin off much more cash on an annual basis than a well run wirehouse business will.

But there is no Lump Sum payment when you go independent.

This is why the vast majority of the big team moves in 2015 were not to the independent RIA sector.  Lump Sum Economics ruled the day; it usually does.

And yet, the Biggest deals for 2015 were in the RIA space as we saw Constellation sell to First Republic and Baker Street sell to AMG……both for more than $100million.

When Paul Tramontano and Jon Goldstein founded Constellation a decade ago, they didn’t “take a check” to do it.  They took a big risk, with the understanding that with big risk, comes the possibility for big reward.  And that big reward showed up on June 17, 2015 when First Republic handed the partners of Constellation $115million.

And to make the terms even more compelling? The proceeds from the sale of the business got  booked on a Cap Gains basis. Obviously.

So, we decided to try and figure out how we could deliver a hybrid model to big teams that dream of going independent, like so many do.

So many of the big teams simply can’t get comfortable with the financial risks associated with starting an RIA… we set out to reduce the risks , while containing the costs, and maintaining as much of the rewards as possible.

We looked at every financing option available in the market today and determined that nobody wants to truly own the risk.
Loans from Live Oak Bank and others are not inexpensive,  and equity lump sums can’t be delivered until the RIA is up and running for at least a year.

There is a 365 day time period that neither side wants to go into unprotected. It is sort of like that scene in Tom Hanks’ “Bridge of Sighs” where the two hostages were being exchanged.  That long bridge represents the 365 days it takes for an RIA to get launched and eligible for equity investment on a cap gains basis.

So, we solved for both.

We took the traditional RIA pro forma modeling to another level. We found cheap debt and friendly and reasonable equity. We then load a capital blend into a P&L model that is profitable enough to absorb the costs of these two forms of capital. The founders are selling some of their upside; mitigating some of their risk.

If the model doesn’t pencil out, riaCS will  ask our  capital partners to tweak the formula, using different inputs, and we will re-present it until we arrive at a model that works for everyone, and away we go!
If the three sides can’t come to an agreement? It wasn’t meant to be.

If a capital solution can’t be agreed to? The team is either not suited to go independent, or should do it without capital partners.

The bottom line? riaCapitalSolutions is delivering reasonable and pragmatic Lump Sum economics to the breakaway space.

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