In a red-hot M&A market, $1B+ firms that may have once been considered buyers are being acquired like never before. What’s driving the change?
In years past, a $1B+ independent firm would have automatically considered themselves a legitimate buyer. But today, with the red-hot M&A market spurred by scores of private equity capital, serial acquirers, and the emergence of mega-RIAs boasting a full suite of comprehensive client services, AUM is no longer a predictor of buyer status.
To see this trend in action, look no further than recent deal activity. According to Fidelity’s January Wealth Management M&A Transactions Report, there were seven reported transactions with sellers over $1B in AUM—including CAPTRUST’s $3.4B merger with MRA Associates, CI Financial’s largest transaction to date with $6B Segall Bryant & Hamill ($23B of total assets), and Hightower’s deal with $8B Bel Air Investment Advisors.
In 2020, the average M&A deal amongst RIAs was $1.8B (according to Echelon Partners 2020 RIA M&A Deal Report).
Clearly, larger firms are selling in droves and January ’21 wasn’t an outlier.
If AUM is no longer a reliable gauge of buy-side status, then how can firm owners decide if they should be buyers or sellers?
Buy vs Sell: Which side is your firm on?
Each of the aforementioned firms had well over $1B in AUM, professional management teams, and impeccable reputations—a formula typically indicative of a buyer. Yet, they opted to be on the sell-side rather than the buy-side. Why is that? Let’s break it down…
First, the definition of a “scaled RIA” has certainly been inflated the last few years—with increasing competition from elite firms and changing client expectations that require significantly more investment from a firm to remain relevant. Additionally, each likely recognized that adding a producing advisor or acquiring firms under their flag to bolster their scale wouldn’t necessarily solve for other issues they were facing.
In this competitive market, RIAs interested in acquiring and recruiting experienced advisors have to be either all-in on inorganic growth or proactively decide to join forces with a larger entity. There is no longer a “middle ground”—unless one opts for the status quo of running a “book of business” rather than an enterprise.
What it takes to be a buyer
So what does it really take to be a buyer or competitive recruiter? Having evaluated prospective buyers and recruiting firms on behalf of my advisor clients, we’ve identified several key attributes:
- Significant capital – Valuations are on the rise with many new deep-pocketed buyers in the market. Having external capital backing, a significant existing line of credit or other cash on hand is crucial.
- Willingness to take a risk – Given the shift toward more “seller-friendly” deals, legitimate buyers should be prepared to put up at least 70% of a purchase price at closing. Gone are the days of sellers “buying themselves with their own cash flow” or accepting deals weighted toward earnouts and protracted notes payable.
- Well-articulated inorganic growth strategy – Sellers will be drawn to firms that have clearly defined WHY they are looking to grow inorganically. They’ll want to learn how M&A fits into the buyer’s overall strategy, what the addition of advisors will enable them to do, as well as get a glimpse into what life may be like post-transaction. Keep in mind that savvy advisors will sense those just interested in M&A because of the financial motivations or to mask their own lack of growth. Additionally, a targeted approach (e.g., firms with specific attributes and within a limited geographic area) most often plays better than a super-regional or national strategy. That is, until the firm has notched a few deals under its belt—because in this competitive market it’s far easier to win local deals than to compete on a national basis with the major acquirers.
- Demonstrable organic growth story – Such as repeat acquirers that have cracked the code on their organic growth engines through custodial referral programs, digital marketing, COI networks, or by leveraging their scale to hire full-time business development professionals. Whether an owner is looking to sell for succession or is joining the new firm for the long haul, they will be attracted to firms that can tangibly demonstrate growth absent M&A.
- Next generation leadership and advisor teams – Sellers are drawn to firms with staying power and where they can credibly tell clients they will be best served for years to come. Although there are some terrific firms with more seasoned teams, a prospective seller may worry about the firm being sold in the not-so-distant future. Further, firms with a solid next gen bench of talent typically have a proven succession and continuity process.
- Commitment to invest in growing the business – Competing with the mega national firms and the new crop of regional players means having the profitability, capital, and vision to invest ahead of their growth into human capital, technology, marketing, and professionalizing the business through non-advisor C-suite leaders.
- Dedicated deal team and recruitment organization – Recruitment and acquisitions are a full-time job that take focused resources and repeatable processes. While a successful inorganic growth strategy requires the buy-in and involvement from the entire organization, those firms that do not split the C-suite leadership, financial advisor, and recruitment/acquisition roles will struggle to build momentum since transactions require frequent attention and “you have to kiss a lot of frogs” before you find the right fit.
- Distinctive value proposition – Without a client- and advisor-facing unique value proposition that stands out from the hundreds of other firms seeking the same professionals, even the most well-intentioned inorganic growth strategies will languish. Proving to a seller or recruit that they can better serve their clients, grow their business faster, and have an improved quality of life while part of your organization are necessary components.
There is nothing wrong with seeking to recruit and acquire if your firm does not possess the above qualities. However, for those who place a high-degree of emphasis on inorganic growth to gain scale, bolster their talent base, acquire new capabilities, or solve for their eventual succession plan, pushing their chips to the middle of the table and going all-in as a buyer or seller is really the only option.