RIA M&A: What drives the best deals?


    RIA M&A teaches us a lesson. In a highly competitive market for buyers and an increasingly saturated market for sellers, it takes more to stand out from the crowd. Access to capital and an interest in growth aren’t enough to be a successful buyer, and sellers can’t just put up a sell sign and expect fantastic results.

    The BlackRock-sponsored 2022 RIA Deal Room Report, due out in the spring, will dive beneath the flashy M&A headlines of 2021 to assess what it took to close a deal. The number of transactions in 2021 set an annual record and early RIA Deal Room research points to another double-digit percentage increase in average ratings.

    It’s easy to conclude that buyers are paying higher premiums than ever before and more and more owners are putting their businesses up for sale to take advantage of the prices. But if you ask the right questions, the numbers will tell you more.

    Why are firms known for making acquisitions more successful with transactions than smaller, opportunistic players? Why do some sellers charge premiums higher than their counterparts? Surprisingly, for buyers and sellers, the answer is the same—the companies with the best stories win.

    Both buyers and sellers need to present a compelling image in order to stand out from the competition. The same equation that wins acquisitions creates a way to sell at a premium valuation. The stories of successful RIAs reveal expertise in three areas: organic growth, employee engagement, and platform and service strength.

    Engine for organic growth

    Strong stock market performance and inorganic growth activity can hide a critical underpinning of value – the metric for new organic growth. Achieving sustainable organic growth is not an option; A company that relies on market performance to disguise net outflows from customer churn or fund drawdowns is not a sustainable company.

    Buyer: The market rewards buyers who have a durable growth engine that can be deployed across geographies by penetrating attractive growth channels. Aspiring acquirers must demonstrate the ability to help others grow faster than their current state.

    Seller: The market favors those with consistent organic growth. This growth is measured net of the market (versus absolute value) and reflects new customer acquisition and favorable customer demographics. Higher growth leads to higher valuations. Additionally, seller-perceived optionality (due to lower risk and higher upside potential) and additional qualities prompt buyers to bid more competitively.

    employee engagement

    Now that remote work is a viable option for many wealth management firms, talent is more mobile and more easily attracted to platforms with compelling growth stories and career paths. RIAs are responsible for developing the next generation of talent, and the best RIAs create attractive homes for talent by providing clearly defined career paths and development opportunities.

    Buyer: The most successful buyers easily communicate how talent on their platform is exponentially outperforming the best alternative. This can influence potential sellers when considering the ideal long-term solution for their talented teams. The Substance is a well-crafted approach to career development, compensation, and influence.

    Seller: The market rewards sellers with a convincing bank. Acquisition brands are publicly expressing their desire to build depth through talent acquisition. Potential sellers or partners who expand the depth and geographic or demographic reach of a partner firm receive a premium over competitors who cannot.

    Platform and service strength

    The competitive bar is rising for all wealth management firms. Standing out from the crowd is becoming increasingly difficult as customers seek more value for their charge. The most well-known platforms have implemented a wide range of services that create “one-stop shops” for end investors. Increasing platform breadth allows those same platforms to provide immediate value to potential sellers and talented professionals.

    Buyer: Sellers often prefer buyers who can offer their customers an expanded range of services or streamline back-office operations. This dynamic has intensified in recent years, contributing to the rise of acquisition brands. To compete effectively, potential buyers must demonstrate their value-added philosophy that appeals to both customers and the next generation of employees.

    Seller: Buyers respond positively to a well-established platform because it inspires confidence in the company’s ability to grow without sacrificing customer service. Additionally, vendors with a thoughtful approach to niche customers, value-added services, or a segmented approach have a unique history of growing/expanding a platform. An established platform pushing niche services sets a seller apart from the crowd in terms of rating and suitability.

    The story matters

    If you look beyond the headlines, the increasing M&A volumes haven’t guaranteed the same outcome for everyone involved. The market places greater value on growing companies with loyal talent and scalable niche offerings. Acquirers want to buy these companies and sellers want to join them because they offer customers, employees and clients more options. Additionally, these three focus areas have tremendous applicability to RIAs striving to remain independent and increase their company’s reputation and value. The RIA industry needs to stay diligent and learn from mergers and acquisitions as a leading indicator of the shifting competitive balance.

    Brandon Kawal is a Principal at Advisor Growth Strategies, an RIA management and transaction advisory firm.

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