Understand the Fundamentals of RIA M&A
You are a Registered Investment Advisor (RIA) owner, getting calls — sometimes weekly — from larger RIAs, to gauge your interest in a partnership, potential sale or merger. It feels good to know that you’ve built a practice that has the attention of larger players in the industry, and your interest is piqued, but you aren’t sure you are prepared to navigate the RIA M&A landscape effectively.
M&A Foundational Components
While you may not be a M&A advisor or deal attorney, understanding M&A fundamentals is essential for RIA owners considering a sale or merger. In this article, we will discuss the following foundational components involved in RIA M&A:
Understanding Your Firm’s Worth: RIA Valuation
Knowing the Buyer Market: Aligning Goals and Values
Ensuring Owner Alignment: Setting Expectations
Getting Your House (and Data) In Order
Hiring the Right Professionals
Understand Your Firm’s Worth: RIA Valuation
Conducting a comprehensive valuation is a proven first step in your M&A journey. Your RIA’s equity value is your most precious currency, and a third party business valuation will inform internal stakeholders on their equity value.
At ADP, we perform dozens of RIA valuations each year. We use modern analytical methods combined with a deep understanding of what drives value in the wealth business. We provide our RIA clients with a true understanding of the value each shareholder can expect to receive in a transaction We also highlight each client’s unique value drivers, to help them unlock their firm’s hidden value.
A transparent and arms-length valuation that properly captures the nuances of your business sets the foundation for unlocking value in a sale context.
Know the Buyer Market: Aligning Goals and Values
It is critical that you can identify and deeply understand today’s RIA buyer landscape, and the unique business models and cultures of the top acquirers. If you have M&A aspirations, partnering with a larger RIA or capital provider that shares your vision and values is paramount. Look for firms with complementary strengths, aligned investment strategies, new services, employee development, and a track record of growth to allow you to achieve your goals.
You can learn a lot via buyer websites, podcasts, videos and other marketing materials, but it will be essential to meet with key people, such as the chief investment officer, head of people resources and marketing. These leaders will answer your critical questions about investment philosophy, for example, and how the business is run. Just as important, they are the face and personality of a potential new partner. As a top M&A advisor, in a sale process we lead these meetings early in the process, so you will know which buyers will be right for you.
Ensure Owner Alignment: Setting Expectations
Alignment among your firm’s owners is crucial for a successful transaction. You must openly discuss — and agree on — key elements of your future vision, such as individual timelines, go-forward roles, and anticipated needs of the business. Owner alignment will enable you to achieve your vision while giving potential buyers a clear target to hit.
As we discuss in our two-part series Aligning Stakeholder Interest, RIA owners must be on the same page when it comes to your preferred growth strategy (going to market or not), desired deal structure, ideal composite of an external partner, and future needs of your clients and employees.
At ADP, we strongly endorse the importance of aligning owner interests before consummating a transaction.
Get Your House (and Data) In Order
Presenting your firm to the marketplace in a professional manner leads to smoother transactions and higher valuations. A well-crafted confidential information memorandum (CIM) is essential when presenting your firm to today’s well-heeled buyers.
A mastery of your firm’s financial information, client characteristics, net asset flows and other key company data is what’s required to create a compelling CIM. And once you get into diligence, having clean and readily accessible data and documentation might mean the difference between closing on schedule or missing the market.
The CIM is essentially your company’s pitch book. The right one will provide clear and accurate data, and a clear picture of your RIA to help ensure buyers see you as the partner they are looking for.
Hire the Right Professionals
A seasoned M&A advisor with highly specialized industry knowledge and a proven M&A process is necessary to level the playing field. Today’s buyers and capital providers are extremely sophisticated, so you need someone on your team who will go to bat for you.
Additionally, an experienced deal attorney with RIA industry transaction experience is the only way to protect your interests within today’s highly complex transactions. Finally, sophisticated tax counsel will help you see around the corner and avoid making costly tax mistakes.
We have worked with RIAs for over 16 years, providing the blueprint for RIA M&A success to hundreds of clients. By mastering the fundamentals above, and with the help of Advice Dynamics Partners, you can position your RIA firm for a successful M&A transaction, which means amplifying your business’s strengths while minimizing transaction risk.
This article 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.