Getting the Most from Outside Capital

– Insights from Liz Nesvold at our 2025 ClientWise Ensemble Leaders’ Summit –

Your business is more than just a balance sheet; it’s your life’s work. Yet there often comes a point when the desire for accelerated growth, the need to scale, or the absence of a succession plan requires more than organic cash flow. This is where the power and potential of outside capital come into play.

Bringing on a capital partner is invariably one of the most significant decisions you will ever make as a firm leader. When executed correctly, it can serve as a high-octane accelerant for growth; but when poorly planned, it can lead to cultural erosion and strategic drift. To make the most of outside capital, you need to look beyond the basic revenue multiple and focus on long-term stewardship, cultural alignment, and strategic integration.

Why seek out capital now?

The most successful firms don’t raise capital just because it’s available. They seek it out because they’ve reached an inflection point. For most firms, these prompts typically fall into one of the following three categories:

• Partner liquidity and succession: Maybe you have one or more partners preparing to exit the firm and need funds to buy out their ownership share. Perhaps you have a talented next-generation team in place as future successors, but the individuals lack the liquid capital to buy out a founding partner’s equity. Or you might simply want to take some equity off the table for personal liquidity. Outside capital can solve these challenges, providing owners with much-needed liquidity or helping to finance your G2 team’s path to ownership.

• Growth capital: This is ‘offensive’ capital that can be used to hire specialized talent, move into larger headquarters, or fund lift-outs – bringing over teams from other organizations that may be seeking equity guarantees or upfront cash payments to make the transition to your firm.

• M&A readiness: Capital could provide you with an invaluable ‘war chest’ to facilitate the acquisition of other firms, allowing you to follow clients into new markets or extend your service continuum (e.g., adding trust capabilities, deepening your financial planning bench, or gaining new specialized expertise such as working with physicians or athletes and entertainers).

Stewardship and the intellectual curiosity of leaders

Investment bankers and advisors often focus solely on valuation multiples. However, intellectually curious leaders focus on Value Creation. They ask: “Where does this firm need to be in ten years, and how do we generate 10X our current impact?” Being a true steward of capital (whether it’s your own or a partner’s) requires breaking that 10-year vision down into actionable steps:

1. Annual initiatives – Identifying your firm’s top three strategic moves for the year

2. Quarterly benchmarks – Ensuring the business is meeting all the necessary KPIs to sustain healthy growth

3. Human capital diligence – Understanding that every new hire or acquisition matters not just financially but also, to some extent, impacts the overall culture of your firm

The goal is to build an enduring business that can stand the test of time, even when the market eventually pulls back and weaker deals begin to crumble.

While M&A may seem exciting and offer a fast path to rapid growth, it should be pursued only when and if it aligns with your business’s strategy. Your firm should be ‘M&A ready’ long before you consider signing a letter of intent. This means focusing first on organic growth (far above and beyond market growth). Even if you’re a $1 billion firm aiming to attract a high-performing team, that team will want to see evidence of genuine growth.

It’s not uncommon to encounter firms professing a 15% annual growth rate, only to discover that 10+% of that growth has been driven by market appreciation. This is why more firms in the M&A space focus on Net New Assets (NNA) as a truer measure of growth. NNA can be expressed using the following formula:

NNA = New Client Assets + [Existing Client Contributions – (Withdrawals + Lost Client Assets)]

Growth creates a pathway for every team member to level up. If your firm isn't growing organically, any outside capital used for acquisitions will merely mask a stagnant core.

Selecting the right capital partner

Not all capital is created equal. Some partners want traditional equity and control, while others offer ‘beneficial’ equity – providing patient capital and board-level advice without trying to dictate how the CEO should run day-to-day operations.

Before signing any term sheet, take time to ensure you fully understand the deal's structure, including:

• The cost of capital: Is it senior debt, a term loan, or some form of mezzanine capital? What is the annual requirement to service that capital?

• Exit certainty: Is the capital partnership ‘time-certain’? How does the partner plan to exit their investment in five or ten years?

• Alignment: If your goal is to grow into a $5 billion firm, does your capital partner have the network and expertise to help you attract and retain the talent needed to get there?

Identifying potential cracks and red flags

The journey from the courting stage to the altar of a completed deal is where most capital partnerships fail. Yet there are common cracks and red flags that often emerge during the documentation phase. Recognizing them early can save you a world of headaches and regret down the road. For example:

• Trust gaps – Standard language in ‘Representations and Warranties’ can sometimes feel like a personal attack to a seller who has spent 30 years building a business (especially if they’ve never been involved in any past M&A activity). They may interpret typical legal safeguards as a lack of trust. To overcome this, you need to maintain an open dialogue, explaining that these documents are standard pre-nuptial terms to help ensure a long-term professional marriage.

• Due diligence realities – Similarly, cracks tend to appear whenever undisclosed due diligence issues surface. Maybe you look at a prospective acquisition’s book of business and realize that the average client age is 75+ and that there are no established connections to the next generation. Things like this don't necessarily mean it's a bad deal; it just means you may have to reshape the deal structure. Maybe you pay them differently over time for their franchise based on retention, and then some growth is overlaid into that as well. 

Probably half the time, those cracks can be cemented over through proper structuring and conversation. But if there are things on your list of insurmountable obstacles, run the other way. If there are things like abusive traits, talking to teammates, or anything that doesn’t feel right, that’s not a good deal for you.

If you're exploring a capital deal, first and foremost make sure everything is spelled out clearly. If you're reading an agreement and important issues aren't clearly articulated, such as: How do you exit the partnership? Is the deal time-certain? Does the capital partner have the right to bring someone to the table as a minority investor? 

You also need to think carefully about how you communicate with the team. What do you say, and when do you say it? For instance, when you first meet someone, it’s probably not the right time to tell your team, because people will naturally worry about potential change. Unless you can give them detailed information, change usually feels negative. It's not because you're trying to be secretive, but rather because you're trying to make sure that this is the right thing. By the time you're getting into diligence, however, you have to involve people. Sometimes that may be a subset of your team, and it will include people handling financials, running investments, and managing operations. 

If it's a small team, you'll need to decide who else to inform. If a deal is strictly about growth and opportunity, it may be helpful to communicate a little earlier in the process (once you're sure it’s something you truly want to pursue). Explain why it’s a good thing for the team and how it will create an opportunity for everyone to level up. Be prepared with answers to FAQs as soon as you communicate your intentions. 

Play the long game

Outside capital is a tool to help you achieve a vision, not a substitute for an effective business model. The most successful firms use capital not just to acquire but to refine their KPIs, enhance their client segmentation, and make disciplined technology investments, along with any selective acquisitions.

By remaining intellectually curious, being a good steward of resources, and choosing partners who share your long-term horizon, you can ensure that your foray into outside capital isn't just a transaction – it's the foundation of an enduring legacy.

Coaching Questions from this Article

1. Think about your 10-year growth vision. Which catalyst (partner liquidity, offensive growth, or M&A readiness) would be your primary driver for seeking capital, and how would the capital specifically impact your future growth?
2. If you strip away all the market appreciation over the last 3 years, what does your NNA (see formula above) indicate about the underlying health of your business model?
3. Beyond the valuation figure, what 3 non-negotiable traits must your ideal capital partner possess regarding day-to-day operations and 'exit certainty'? Conversely, what 'red flags' in a partner's leadership style or timeline would make you walk away from a deal, even if the financial terms were favorable?

Recommended Further Reading from ClientWise

1. Steady Your Trajectory for Successful M&A: How to create more harmonious relationships and predictable outcomes (Read)

2. Before Taking Any M&A Action, Make Sure to Know Your ‘Why’ (Read)

3. Scaling Smart: The Path Forward for Advisory Teams That Want to Win the Long Game (Read)

4. Setting the Right Growth Pace: Balancing Ambition and Stability for Financial Advisory Firms (Read)

5. Unlocking Hidden Opportunities: Three Actionable Tactics to Tackle Before Year-End (Read)

6. New Success in Succession™ Program Addresses Glaring Gap (Read)

Questions Financial Advisors Often Ask

What is outside capital for advisory firms?

Outside capital is funding from an external partner used to help advisory firms accelerate growth, fund succession, support acquisitions, or provide partner liquidity beyond organic cash flow.

Why do advisory firms seek outside capital?

Firms seek outside capital after reaching an inflection point, most often driven by succession needs, growth opportunities, or preparation for mergers and acquisitions.

When is the right time to take on outside capital?

The right time is when a firm has a clear long-term vision, demonstrated organic growth, and a strategic reason for capital beyond availability or market conditions.

What are the main reasons firms raise outside capital?

The three primary reasons are partner liquidity and succession planning, offensive growth investments, and building M&A readiness.

What does it mean to be M&A ready?

Being M&A ready means having strong organic growth, strategic alignment, and operational discipline in place before pursuing acquisitions.

Why is organic growth important before pursuing acquisitions?

Organic growth demonstrates the health of the core business. Without it, acquisitions funded by outside capital may only mask stagnation rather than create sustainable value.

What is Net New Assets (NNA)?

Net New Assets is a measure of true growth that removes market appreciation and reflects client-driven asset expansion.

How do you calculate Net New Assets?

NNA is calculated as: New Client Assets plus existing client contributions, minus withdrawals and lost client assets.

What should firms evaluate when selecting a capital partner?

Firms should assess the cost of capital, exit certainty, time horizon, and alignment with long-term growth goals.

What are common red flags in capital partnerships?

Red flags include misaligned exit timelines, lack of clarity in agreements, cultural incompatibility, undisclosed diligence issues, and behaviors that signal poor long-term fit.