The signals sometimes seem conflicting. The advisor population is aging, with little new blood to replace it—the average advisor is in their mid-50s, and industry conferences are dominated by grey-haired professionals. It seems like, at least on paper, it would be a buyer’s market out there, favoring advisors who are looking to acquire or merge with other firms.
But then you get to the fishing hole and realize there are more hooks in the water than fish.
A recent survey showed that over 75% of RIAs expect to merge with or acquire another firm soon, but only 14% expect to be acquired. This points to the larger trend, and the conflicting signals: Advisors are getting older and should be selling, but they aren’t.
Let’s look at how acquisition works, and how you might be able to circumvent the competition and make that elusive catch.
How Acquisitions Work
There are as many approaches out there as there are deals to be made, with every firm having its own unique makeup of AUM, practices and—of course—personalities. The most common approach we see these days is the full acquisition model, which breaks down into five categories:
1. Cash Deal
This is the most straightforward. The buyer and seller agree on a price and the buyer pays it. Things are never as cut-and-dry as they seem, but this is as close as you’ll get. The intricacy comes with the details of branding, personnel, policies and investing approaches, and that’s where there’s a lot of variety.
2. Cash with Earnout
Not surprisingly, a seller and a buyer may have different ideas as to how much the firm is worth. The seller has put their own blood-and-sweat equity into it, and the buyer is trying to lowball to clear profits.
An earnout model can help alleviate some of this tension. The buyer pays a certain price, but with the caveat of giving a percentage of the earnings over time to the seller. So, the buyer might pay $1.5M rather than $2M and then pay 5% of gross earnings over the next few years. The deal can still be made, but with some financial qualification.
3. Minority Interest with Buyout Option
In this approach, the owner sells a minority equity position (less than 50%) with the understanding that the incumbent buyer’s share in the business will grow in a short amount of time. The growth is usually done by tranches or milestones, ending with a complete acquisition.
4. Minority Interest Trend
This approach has worked well for us at Fusion in the sense of allowing a real acquisition to take place with concrete goals, while still allowing ongoing flexibility in how the buyer and seller work together.
The seller doesn’t immediately have to give up complete control as they might with a 100% acquisition, and they can get in on the action of the firm growing with further business and acquisitions if the incumbent owner is successful.
The minority interest approach can work well in succession planning, where the owner wants to remain involved but is turning toward retirement. This gives the departing advisor a chance to remain involved, draw a salary and still leave a mark on the firm’s future. If the incumbent owner grows the firm, the seller can finish strong and watch their business grow.
In our experience, the minority interest model is steadily popular and can work well for all parties involved.
5. Debt-based deals (proceed with caution!)
In our experience, the debt-based model is one to avoid or at least approach very carefully. Leveraged buyouts tend to be more expensive than you’d think. This often brings in another lender for an infusion of capital, which means another seat at the table and several more variables.
3 Tips for Frustrated Buyers
BlackRock’s 2017 Elite RIA Study found that 40% of the successful firms they studied planned to expand through M&A in the near future, providing even more evidence of an overfished pond.
It’s easy to get frustrated, but that won’t really get you anywhere. To use an everyday example, your approach needs to be a bit like the homebuyer’s letter in a seller’s market. You write a letter with personal appeal, telling the seller how happy/honored/well-fitted you’d be to buy their home, and therefore standout from competing offers.
Here are a few tips to make that elusive catch.
1. Get Underneath the Seller’s Needs
Don’t just talk numbers, talk to the person you’re hoping to buy from. Do they have a technology need or interest? Present them with the tech you use and the success you’ve had with it, not with a vague promise to free up money make a “substantial investment” in that direction. If you’re in a minority-interest deal where you’re taking on their staff or otherwise keeping the owner involved, seeing new tech in action may appeal to them.
Do they have a commitment to a particular niche or people group? Be sensitive to that. If they have an abiding relationship with veterans, highlight any veterans you may have on staff or in your family, and share your mastery of working with TSPs.
It’s not just price and valuation here. You’re showing that you will, in many senses, “take care of their baby.” Are you going to honor their firm’s personality or crush and assimilate it? They can find plenty of big corporate firms to do that—and probably for more money.
2. Demonstrate Flexibility in Deal Proposals
Remember, your goal here is to acquire and grow. Sellers have different goals—some advisors may want to keep working, exit slowly, etc. Even if you have a stack of cash on hand, you may not be able to simply buy outright, and shouldn’t be too rigid about your stipulations for purchase.
Think of a firm which is not in desperate financial straits, but is considering selling because the founder is looking at retiring and wants to take care of their staff. Presenting this seller with cold capital and no plans to keep their team or regard their vision will kill the conversation right away.
Take the long view: A larger firm means better business for you in the future, so it could be worth the sweat equity it takes to have a more complex conversation on the front end.
3. Think Through the Headlines
The messaging in the industry right now is that there are more sellers than buyers, and the data seems like it backs that up. But that’s just not the reality for the majority of buyers.
Advisors are having trouble giving up their post, and many don’t have a solid succession plan in place. Especially after the pervasive uncertainty of 2020, not to mention the lost revenue, it all adds up to reluctant sellers.
Savvy RIAs wanting to acquire need to think through this seller’s market dynamic and show flexibility and sensitivity in conversations. In most cases, you almost definitely won’t be the only buyer.
4. Set Yourself Apart
Which brings us to our final tip: You’re not only option they have, so make sure they know you’re different quickly. Just like the homebuyer’s letter in a seller’s market, you need to stick out somehow when a seller has competing solid offers on the table.
How Fusion Financial Partners Helps Advisors with Inorganic Growth Strategies
Inorganic growth for RIAs through M&A is decidedly the future, with consolidation becoming the new normal. At Fusion FP, we build the biggest brands in wealth management, and working with us means you harness that experience and expertise. Our experienced management consultants can help you navigate your way through the opportunities and pitfalls of the M&A process.
M&A should be broken down into three categories:
1. M&A for the Owners
If an owner is looking to monetize, we help them find capital and lead the discussions. This could be full acquisition or partial, depending on the needs. What is important here is having an experienced consultant that can help you not just find capital, but also to help you prepare for what to expect from after the deal closes.
2. M&A for Advisory Firms Looking to Grow by Acquiring Other Advisors
You might hear this called a “tuck-in.” Here, we offer our deal-making experience, consulting/training on how to manage a pipeline, tactical support in conversations with the target advisor, M&A readiness assessment, and conversion assistance once the term sheet is signed.
This is basically a well-tuned M&A division at the ready for RIAs—we serve as your OCGO (outsourced chief growth officer). We are doing exactly this for several multi-billion-dollar RIAs today.
3. M&A for Succession Planning
We also offer consulting to owners and next gen. We work through deal structures, equity table, capital sourcing, and relationship dynamics (through an on-staff psychologist from Fusion). This a long, three-dimensional discussion with much more than timetables and spreadsheets involved. It’s important that you deal with the relational aspects as well as the financial.
Ready to Grow?
We offer unique expertise in managing and clarifying these intricate conversations. Our experts have helped hundreds of firms through M&A and other processes, and we also have a hand in some of the fastest-growing firms in the industry.