As discussed in my previous blog, the accelerating pace of merger and acquisition (M&A) transactions is reshaping the RIA landscape and causing many advisors to consider the possibility of merging with or acquiring another firm, or possibly being acquired themselves.

A decision of that magnitude certainly requires careful consideration, and advisors must think long and hard about what makes the most sense in their specific circumstances. For those advisors who are considering some type of merger or acquisition, positioning and preparation are critically important.

Just as advisors endeavor to provide their clients the best possible financial advice, advisors who are seriously considering an M&A deal should seek out the best advice, including legal counsel, accounting services, and, depending on the transaction size, investment bankers. RIAs are clearly highly skilled in investment management and developing financial planning strategies for clients, but may not have the expertise required to successfully navigate an M&A deal to their best advantage. That’s why the earlier in the process advisors can bring in the expertise they may lack, the better the results of the transaction are likely to be.

Does Your Legal Counsel Have the Right Expertise?

RIA firms undoubtedly have attorneys who advise them on a variety of legal and compliance issues related to their financial advisory practices. Those attorneys, however, may not be the right or best choice for advice on an M&A deal. It’s important to engage legal counsel who are experienced in these types of transactions as soon as the possibility of an M&A deal is being seriously considered and discussed.

Legal counsel experienced in M&A transactions will help in every step of the negotiations, from the first communication of interest by a buyer or prospective merger partner, through negotiation of the terms and conditions of the transaction, to the closing of the deal.

Knowledgeable M&A attorneys can help answer questions such as:

  • What rights and warranties might I retain and/or lose in a sale?
  • What is customary for a buyer to ask in an M&A deal?

The right M&A attorneys are able to navigate the nuances around a transaction. As a buyer or a seller, the more you understand those nuances, the better position you will be in to negotiate. If you know what is reasonable to ask for, and what is customary for the other party to ask for, you will be better prepared. Then, as the negotiations ramp up, you will be better positioned to have a more informed dialogue, instead of coming in unprepared. That will increase your chances of completing a successful and satisfying deal.

Are Your Books in Order?

It may seem obvious, but any RIA firm that is considering an M&A deal or thinking about being acquired must ensure that its financial records are in order. If that requires hiring an established accounting firm, doing it sooner rather than later is likely to help make for a smoother transaction.

Many small advisors perform their own accounting and record-keeping in house. There is nothing necessarily wrong with that, assuming the process is thorough and rigorous. However, record-keeping procedures at smaller firms may not be as comprehensive and detailed as those used by established, dedicated accounting and auditing firms. Potential M&A partners will insist on accurate records as part of the requisite due diligence process. Incomplete or inaccurate records can be a deal-killer.

Making sure your books, records, and files are in order now is something that will benefit you down the road if you seek any type of M&A deal. It will help shorten the due diligence period and ensure a smoother road to closing the deal.

How Do You Determine the Right Valuation?

Perhaps the most important consideration in any M&A deal is valuation. An investment bank may be helpful in establishing valuation in an M&A transaction, however, smaller RIAs might not have the size and/or scale to get the attention of an investment bank. In that case, a knowledgeable accounting firm or M&A attorney may help provide guidance on valuation and other financial aspects of the transaction.

Most RIAs have professional relationships with accountants, attorneys and others whom they should be consulting early in the process of any potential M&A transaction. If an RIA is approached by a recruiter from a custodian or other potential acquirer, having an independent assessment of the valuation of their practice, in advance, is likely to be beneficial as discussions begin.

Despite the record-setting pace of M&A deals in the RIA space, some industry observers say advisors should not be fooled into thinking it’s a seller’s market. Speaking at a recent conference sponsored by the M&A consultancy and investment banking firm Echelon Partners, Dan Seivert, Echelon’s CEO, said that buyers are setting the deal terms and RIA sellers are “leaving tons of money on the table.”1

The reason, according to Seivert, is that advisors have a “blind spot” when it comes to selling their firms. They may think they understand corporate finance because they know wealth management, but the two are very different. The mistake advisors make, says Seivert, is that they focus only on what their firms are worth and not the value of the combined firms. As a result, they often undervalue their firms in a sale.

Advisors who have worked hard to build a practice that may be generating significant revenue, owe it to themselves to be prepared when it comes to assessing the true value of their practice.

The more familiar RIAs are with these concepts, and the more prepared they may be for a possible M&A deal, the better position they will be in to have an informed dialogue with a prospective buyer or merger partner and conclude a successful transaction. It is ultimately about more than just the size of the deal, it is how to ensure the transaction can be completed with as little disruption to their clients as possible.

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  1. ^Source: “RIA sellers are leaving 'tons of money on the table',”, 9/19/17.