RIA Owners: How to Navigate the Complexities of M&A
The M&A landscape for RIAs is complex, with numerous factors influencing the success of a transaction.
In “Understand the Fundamentals of RIA M&A,” I described five foundational components that RIA owners should have a firm grasp of when considering a sale or merger. In this article we look more broadly at some nuances of M&A — from external influences, such as private equity sponsorship, to internal matters, such as how to involve employees in strategic inorganic growth planning.
Understand these complexities when exploring M&A for your RIA:
The Role of Private Equity: Added Value and Considerations
Top Buyers: Identifying the Right Fit
Positioning for Success: Enhancing Firm Value
Strategic Planning: Balancing Transparency and Stability
The Role of Private Equity: Added Value and Considerations
Private Equity (PE) can bring significant value to an RIA firm, including capital, strategic guidance, and operational support.
Understanding the implications of partnering with PE firms — or with RIAs who, themselves, have already partnered with PE — is critical because it may have bearing on the near-term (such as the price offered for an RIA) and the long-term (if and when a PE-backer will be looking to exit their investment and what this form of recapitalization means in terms of a valuation “pop”).
‘Requirement to exit’ is a big consideration when PE firms look at RIAs to invest in. And according to InvestmentNews, as reported in January 2024, “PE investors have their exits planned anywhere from three to seven years after acquisitions, and they tend to target returns of three to five times what they invested over five years.” Timing and “vintage” is a key factor in how involved PE firms are in the wealth management firms they invest in.
Consider the following with regards to PE sponsors:
If you are looking at prospective buyers: Do they have a PE sponsor(s), and if so, how many years have passed since the initial investment? If a buyer doesn’t have PE sponsorship, are they considering it?
If you are looking to grow your firm through PE capital investment, consider PE firms that are focused on wealth management, and understand how involved they are with —and the value they bring to — other firms in which they’ve invested.
Although the influx of PE to the RIA industry may seem complicated at first, we think, on balance, it’s a positive. PE firms have a lot of dollars they want to put to work, and they see the RIA industry as a great investment.
Top Buyers: Identifying the Right Fit
Different buyers bring different strengths and can have vastly different business models. The sale or merger of your business isn’t just a monetary transaction, it’s a marriage — and the process to get to know your future partner should not be rushed.
At ADP, we manage a “Master Buyer’s List.” In 2022, it had approximately 50 serial acquirers on it. Today it has 85. They range from $1 billion in AUM to $350 billion. In the hundreds of transactions our firm has worked on since 2008, no client’s Prospective Buyers List has ever been the same as another’s.
It's my firm’s duty to bring potential buyers to the table that — after we fully evaluate your business objectives, financial performance, and client needs — we feel would be the right partners for you. At ADP, we meet with buyers often, to understand their latest growth strategies, their compensation plans, the newest services they offer, PE vintage, and more. Based on our highly specialized knowledge, we may suggest up to 15 or more buyers for you to consider, and we’ll help you evaluate them based on critical criteria, such as:
Post-deal track record
Have at least 98% of RIA clients stayed with the new firm?
Have other merged firms been successful?
Financial strength
How much have they grown over the past 5 years organically and inorganically?
Do they have PE backers, and if so, what is their time horizon?
Are they properly leveraged, or over-leveraged?
Alignment with your firm’s goals & unique culture
Where does the buyer see themselves in 5 years?
What types of clients and services do they offer now and seek to offer in the future?
What are their investment strategies?
How do they foster career growth for advisors and other employees?
Once we help you finalize the list of potential partners, we set up enough meetings with each before the solicitation of offers to ensure you have a firm grasp of the buyers. We believe you should feel a connection to them strategically, operationally, and culturally before entering into a transaction with the ultimate winner.
Positioning for Success: Enhancing Firm Value
Position your firm for success by understanding key metrics such as net AUM flow rates, client demographics, and margin expansion potential. Highlight these strengths during negotiations.
Of course, buyers are looking at firms that have been successful in the past. Perhaps more importantly, they are looking to partner with firms that are built to succeed in the future. There can be numerous factors that suggest a successful outlook, but buyers pay attention to:
Asset flow rates: Firms that consistently generate 3-10% net growth rates of AUM command valuation premiums. Top tier firms grow net assets at 10-15%+ each year.
Client growth: Low client attrition rates, and high net new clients annually, suggest strong connections with clients and successful organic growth (marketing).
Strong margins: Ideally, 90% of a RIA’s revenue is recurring and predictable, and a firm keeps expenses in check. For example, human capital costs below 40% of net revenue.
Uncovering these, and other key metrics kicks off our ADP M&A process. To fully understand your business, we often begin with a thorough valuation to discover the true worth of your firm.
Strategic Planning: Balancing Transparency and Stability
Deciding the M&A path to take will require discussions with all owners of your firm, but when? And when do you bring in key employees and partners? Too early, and it may cause unrest; too late, and it may lead to mistrust. Strike a balance to maintain stability.
Our experience at ADP is that communication issues mostly arise when owners don’t have a clear strategy for succession. We don’t recommend owners wait on succession planning until closing in on retirement. The right plan (which may change as your firm grows), will protect enterprise value, help retain clients and talent, and build your legacy. The right plan will likely involve all partners and key staff directly and can even thwart “difficult” conversations when owners eventually seek a partner, merger or sale.
If you don’t have a clear succession plan for your firm, and you are beginning to consider outside partnership, keep the discussions with buyers to your M&A advisor and owners with 10% or more in equity. The sale or merger process can take up to nine months or longer. Suggesting to employees and others, especially critical advisors on your team, that there may be changes at the company — without a defined plan of what the changes will be — might alarm them. Since buyers are essentially acquiring the revenue of your firm, it’s important to maintain “business as usual.”
Once you are down the path with the right buyer — received an offer you like and have begun the due diligence process — you will work with your partner on when, and how, to communicate with staff. Conversations may begin during diligence (some owners require help from employees for diligence) and they will continue strategically as you determine future compensation and growth programs for your staff with the new partner.
Conclusion
The four complexities outlined above are not the only ones you will face during the RIA M&A process. Still, when you understand the role of private equity, the buyer landscape and how they value your firm, have a clear succession strategy– as well as how and when to communicate these plans – you will be in a better position to manage the M&A process successfully and achieve your strategic objectives.
This article — the second in our series “Mastering M&A Fundamentals” — was written by David Selig, founder and CEO of Advice Dynamics Partners. David has over twenty years of experience in M&A, management consulting and financial services. He serves as a champion and advocate for Advice Dynamics’ clients, as he shepherds them through their complex transactions.