Many firms publish quarterly data regarding M&A activity in the RIA space. The data vary a bit based on definition, but the overall message is clear: significant consolidation is occurring, and valuations are high. Larger firms are acquiring smaller firms for many frequently discussed reasons such as gaining talent, offsetting slowing organic growth, or building geographic “density” in a strategic region.
If you are one of the nearly 20,000 RIAs getting regular calls from prospective acquirers, it is important to be prepared to answer the most important question:
In this piece, we would like to stimulate thought regarding the “Why” behind selling your RIA. A follow-up discussion involves “How” to do it.
But first: as a small to medium size RIA, what are your motivations to sell? Do you need to?
Are you reacting to inquiry, the current high valuations, or have you taken the time to step back and assess what you are truly trying to achieve with your business and your future?
Instead of reacting to consistent inquiry from buyers, it is better to proactively define your “Why” by asking yourself a few important questions:
1. What is the long-term vision for your firm?
2. Are you positioned properly for your vision?
3. How would you describe your ideal acquiror?
4. Have you considered being proactive vs. reactive?
One thing we have learned both directly and anecdotally, is that sellers often do not fully know their convictions until they have been tested. For example, perhaps you have thought about selling but the reality of it made you pause. Or maybe you run an actively managed investment strategy and get far along the merger path with a passive strategy firm. Because of a potentially attractive valuation for your firm, you tried to convince yourself that you could switch, but at the eleventh hour you just could not. Another emotional circumstance arises when a founder struggles with the prospect of no longer having his or her name on the door, despite the rational benefits of letting go.
To avoid these obstacles, it is best to ask yourself early on: “Why do I want to sell?”
Is it consistent with a thoughtful plan? Have I taken the steps to best position my clients, my firm, and my team? Do I need help?
If you have decided to sell (today or in the future), there are three primary types of buyers/investors in the marketplace:
1.) 100% Control Acquisition/Integration – In this case, 100% of an RIA is sold and integrated into another firm. The seller takes on the name of the buyer’s firm, becomes part of its consolidated P&L, brand, and business model. Consideration for the transaction can be in cash and/or equity of the acquiring firm, with potential valuation enhancements based on Key Performance Milestones. These firms can focus on different market demographic segments, from Mass Affluent to Ultra High Net Worth. In addition to potentially gaining additional capabilities for your clients, an important benefit to this type of acquisition is that it removes the “running the business” burden from the seller and allows them to return to what they love most: advising existing clients and gaining new clients.
Some of the “Integrators” have a national focus, whereas others can be more regional. The larger firms typically have the backing of a Private Equity (PE) firm, with ample access to capital.
If you are near retirement, you may want to accept less equity, whereas if you want to work for several more years, it could be in your interest to roll more of your own equity into the new firm and participate in its growth.
These acquisitions require consent from a very high percentage of your client revenue base (i.e., 85+%), so it is important that the seller has confidence in the benefits an acquisition provides for his or her clients.
2. Minority (< 25%) Long-Term Capital Investment – Often a Family Office or “Portfolio Investor” who provides long-term (not permanent) capital can be very helpful from a strategic and governance perspective. They allow for autonomy while also providing growth capital. Typically, investments below this percentage do not require client consent.
These investors often have investments in multiple RIAs, and their primary motivation is to receive an attractive annual yield on their investment(s), in addition to equity appreciation over time.
3. Platform Aggregator – Can be control or non-control position, primarily designed to acquire an earnings stream. The RIA retains its name and brand and makes its own day-to-day decisions. In most cases, they can access shared resources from the parent as needed (i.e., HR, Technology, Investment Platform). In addition, the parent company can assist in making sub-market acquisition for your business.
There have been some other types of buyers/investors emerging, such as banks making permanent minority investments, however the majority reflect a variation of the three categories mentioned above. Given the diverse landscape of buyers and growing demand for acquisitions, it is also wise to start thinking proactively about your ideal buyer. Doing so can help further define your “Why.”
About Harbor View Advisors:
Harbor View can serve as your strategic partner to help you navigate the M&A “Labyrinth” and position your firm to achieve your desired outcome. We have deep industry operating experience, as well as extensive M&A Advisory expertise. As your consultant we can prepare your firm for an optimal outcome. As your investment banker, we know the market and can guide you through a successful transaction. Our philosophy is to always be serving our clients with a long-term view toward solving their toughest challenges.
DISCLAIMER This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented
