Whether for growth, succession, a need for scale or some combination of those reasons, the number of advisory firm mergers and acquisitions is quickly accelerating.

In multiple deals since 2015, our firm Bronfman Rothschild has acquired other RIAs or brought in teams of advisors via lift-outs. In the process, we’ve learned some important lessons. Here are our top four tips for prospective sellers.

Start a conversation: All transactions start with a conversation. In fact, a conversation is what ultimately led Neal Simon to join Bronfman Rothschild and become our CEO. Neal had founded Highline Wealth Management, and was introduced to our firm by one of his board members. At the time, Highline was not for sale. But Bronfman Rothschild had a need and ultimately convinced him of the tremendous opportunity. The result was a merger of two comparably sized firms with Neal at the helm.

Recognizing what motivates us — serving clients, building a business, mentoring other advisors — is an important place to start the conversation. Many principals of RIAs reach a level of success where they are spending too much time on non-client-facing activities that they do not enjoy or which could be performed by others. Instead, they should be focusing on higher value-creating activities.

For advisors at existing RIAs, we have found there are a number of reasons why advisors or advisory firms engage in discussions with us. In many cases, there is some level of dysfunction at the firm that may push advisors and their teams to entertain a discussion. Sometimes advisors get anxious when their firm isn’t growing or isn’t growing quickly enough. Other times, advisors recognize that they lack the scalability or resources to take their firms to the next level. In our experience, few engage in the discussion purely for a payout.

Quote
We have learned that we are a good fit for advisors who come from CPA firms or have a CFP designation.

Assess the fit: Once you start the conversation, what are the most important factors in assessing fit? Culture is usually at the top of the list. We spend a lot of time assessing cultural fit, committing significant time on the part of our senior leadership team in the process, as we evaluate the possibility of an advisory team coming on board. For example, we have learned that we are a good fit for advisors who come from CPA firms or have a CFP designation. We are not a good fit for advisors accustomed to a sales culture of pushing products.

Whether you are a buyer or a seller, it is important to spend time gauging the fit. As an acquirer, the seller’s motivation is important, and we work hard to gauge the attitude of the seller. Do the owners seem interested in liquidity and transitioning away from the business, or do they want to buy into the combined firm and become part of a new team focused on growing in the future? For us, conversations that center just around money often are a sign that it won’t be a good fit.

Culture is important to sellers too. For sellers considering joining a new firm, there are several considerations and constituencies to consider.

Quote
In many cases, there is some level of dysfunction at the firm that may push advisors and their teams to entertain a discussion.

Number one is how the firm will treat your clients. Does the new firm have an enhanced platform and service offering that will benefit clients? Number two is your employees — especially the employees who support your clients. Can the new firm help accelerate their professional development? Lastly, how will the firm treat you? Does the firm invest in the tools and training you need to stay on top of your game? What is the attitude about compliance? Does the firm have flexibility around the deal structure to properly incentivize you and your team members?

Whether you are a buyer or a seller, this stage requires a commitment to due diligence and exploration. You may find out quickly that a marriage is not in the future. To avoid spending too much time looking at potential deals that will not come to fruition, we’ve identified a few filters to help us funnel potential firms or lift-out candidates. For example, we have learned to quickly analyze geography, average client size and investment style to assess the fit with our approach.

If you want to engage in M&A, the reality is you need to be committed to investing time on a large number of deals that may not happen, in order to be engaged in the smaller number of deals that will be consummated.

Merging two firms: Before entering a deal, how two companies will join together is an important factor to consider. At Bronfman Rothschild, we want our teams to use the same approach and take advantage of centralized investing and reporting tools. We want to understand and measure what personalities and processes will integrate well and what won’t work. Not every firm is the same, and some approaches will not fit with our existing business.

So, we try to assess how the businesses will operate together in an integrated way. It often comes down to issues of control. Advisors joining a new firm need to understand what is important to them. In what aspects of your business do you need to maintain control? And in what aspects are you willing to cede control over to others?

During the due diligence phase, we put together a cross-functional SWAT team that is able to lead the integration. We assign resources to provide leverage to a newly onboarded team so that they can focus on their most important activities and get in front of their clients. We engage teams in a multi-week training program, and support them as they integrate into our firm.

Valuation: This topic is listed last for a reason; it is often the least important aspect of a transaction.

We are occasionally asked “how much are you willing to pay?” and we always respond, “it depends.” There is no hard-and-fast answer about what a firm is worth. So much depends on the deal structure. Is it a cash or stock transaction? Will the payout be over one year or 10 years? Will it be a merger or a sale? How long will the principals remain involved in the combined enterprise and at what level of compensation? Will consideration be paid to a former employer for release of contractual prohibitions?

Quote
When we find a company we are interested in, it is more often culture or issues of control that get in the way of a successful transaction.

Beyond deal structure, other factors affect valuation. What does the client base look like? Is it stable or aging? To what fee structures and levels are the clients accustomed? What about the employees? Do they bring any special skills to the table? And of course, at the heart of valuation is the cash flow the company produces. We do not look simply at revenue, but also at adjusted EBITDA. We want to understand what the cash flow will look like and then apply a reasonable multiple.

In the end, the price comes down to terms. If you want a higher multiple, you’ll likely have to accept contingent earn-outs and deferred payment terms. Firms that we do not expect to experience growth after a transaction will likely be priced in a narrower band.

However, we rarely find that the multiple gets in the way. While we do come across sellers who simply want the highest number and are circulating a well-prepared sales deck, these conversations rarely progress. But when we find a company we are interested in, it is more often culture or issues of control that get in the way of a successful transaction.

At the end of the day, every deal is different, and the needs of buyers and sellers in the M&A market vary. Buyers and sellers alike should think carefully about what matters most to them. Once there is a meeting of the minds, the deal details tend to fall into place.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access