Advisors doing a deal rarely say what they actually mean.
A big part of our business involves providing funding for M&A transactions. So over the last eight years, we've observed hundreds of RIA buyers and sellers in the midst of potential transactions. And we have seen numerous transactions fail, at least in part because each side's inability to understand the other's perspective became an insurmountable obstacle.
Selling owners are often exceptionally emotional and deeply paranoid; irrational behavior becomes commonplace. Many prospective acquirers, meanwhile, are equally scared that they might actually succeed. Straightforward communication becomes extremely challenging.
Scroll through to see a set of common fibs and misstatements you might hear from both buying and selling advisors, or click here to see them in a slideshow.
Mark P. Hurley is chairman & CEO of Fiduciary Network.
What they say: "Money doesn't matter to me."
What they really mean: "The only thing that matters is the money."
Here's why: Wealth management firms are often brought to market only when owners reach an age at which they recognize that not selling would be personally economically irrational (if not suicidal). Because age is the driver, a transaction is much more than just an economic event. Rather, it represents a life passage -- the end of a major phase of the selling owners' lives.
What they say: "We are now ready to capitalize on our long-term investments in our firm."
What they really mean: "We don't make much money and probably won't for a long time."
Here's why: The industry is not short on rapacious owners -- individuals who have kept as much of the economics for themselves as possible while paying their successors only the minimum amounts necessary for retention. But when these owners try to sell their businesses, they quickly discover that a large percentage of the transaction's overall economics will have to go to the successors, who view the transaction as an opportunity to correct this past unfair treatment.
What they say: "There is zero chance any of my clients will leave."
What they really mean: "OMG, what are my clients going to do once I tell them I am selling?"
Here's why: Many selling owners made a commitment many years ago to their clients -- often as part of their sales pitch -- that they would 'never' sell the business to 'anyone' and would remain 'independent forever.' Now these same owners recognize that they are going to have to tell clients that they are effectively reneging on this commitment.
What they say: "Your projections for future growth are interesting."
What they really mean: "Are you out of your mind?"
Here's why: Prospective acquirers must somehow estimate their potential accretion (i.e., the resulting marginal increased profitability) from the transaction. All of the economic benefit from doing a deal is tied to this number.
Unfortunately, this calculation requires that acquirers somehow accurately forecast the likely level of seller client attrition that they will experience after closing. Yet buyers only rarely personally know any of the seller's clients, and there is no fool-proof methodology for measuring the robustness of a seller's relationship with its clients.
What they say: "If a company's structure causes tax issues, that is your problem."
What they really mean: "Don't remind me (and above all, please do not penalize me) because I set my company up as a C-Corp (and also passed up the earlier opportunity to convert into an S-Corp with no tax penalty)."
Here's why: Sellers often look at a transaction as handing over the reins, and any problems left behind are to be accrued by the firm's successor, the report says. Sellers often anticipate that an inexperienced successor will overlook any historical glitches.
What they say: "Getting the money is no problem."
What they really mean: "We don't have and probably won't be able to get the cash to buy your firm."
Here's why: Over the last eight years, we have encountered more than a few owners of wealth managers who had dreams of being acquirers but did not line up the necessary capital before pursing potential acquisitions. None that we are aware of has ever succeeded in completing a material deal -- because sellers are understandably reluctant to take the risk of running a transaction process and selecting a winner only to find out that the buyer does not yet have the necessary capital.
What they say: "Your successors were very candid when we spoke with them."
What they really mean: "Boy, are these guys angry at you. They somehow are under the impression that you promised to give them the firm. You had better set them straight or we are all wasting our time."
Here's why: Because acquirers are focused on long-term outcomes, they care far more about successor happiness as part of a transaction than what the selling owners get from the deal. Determining that can be challenging, however, because in most transaction processes, the first opportunity for the acquirer to meet the successor advisors is after it has prepared and made the winning bid.
What they say: "Everyone at our firm is excited about this opportunity."
What they really mean: "We are happy to look and see whether you have anything to sell."
Here's why: More than a few prospective sellers have confused the willingness of a buyer to prepare a bid with an indication of being prepared to do a deal. They are sadly mistaken. An acquirer's decision to bid only indicates that it is willing to consider a deal. And right up until the point at which they sign transaction documents, most prospective acquirers have a kind of internal emotional pendulum within them that swings back and forth.
What they say: "It is a bit unusual that your attorney is trying to renegotiate what is in the term sheet."
What they really mean: "You had better tell your lawyer to stop being a wannabe investment banker if you want to have any chance of getting a deal done."
Here's why: We have found that there are very few -- perhaps only three or four -- attorneys nationally who have extensive experience in wealth management M&A. Buyers will often find that the process for arriving at final written agreements can be overwhelming and exhausting as the documents are negotiated and renegotiated again and again over many months, resulting in staggering transaction legal fees for both sides.
What they say: "We want to help you get to the next phase in your life."
What they really mean: "Clearly, you are a raving lunatic."
Here's why: Many surprising seller behaviors stem from a combination of an unrealistic assessment of the quality of the seller's own firm with a miscalculation of the prospective buyer's interest in the acquisition. Many owners view their firms as an extension of themselves; their businesses are the culmination of a life's work.
Consequently, many owners have a difficult time accepting that what they own is still just a tiny business - one that no one will ever confuse with JP Morgan Chase. And many owners still have a difficult time accepting that what they own may not be that meaningful to a buyer. Often this mentality leads them to be ridiculously overconfident as to what prospective acquirers are willing to do to buy their business.
- To Win More Clients, Know Your Biases
- Understanding the Tax Implications of Buying or Selling a Practice - The Asset Sale
- Not Quite Ready to Sell Your Firm? Here's How to Get There.