Registered investment advisory firms are increasingly turning to mergers and acquisitions as a strategy for inorganic growth. This year is expected to break new records for M&A activity in the wealth management industry. And with some 40 to 45 private-equity-backed serial acquirers out there, M&A may seem like the shiny new object to a lot of firms that hadn’t considered it before.
But buyers and sellers can’t just dive into M&A hoping to get a good deal done without proper preparation, M&A advisors said, speaking at The MarketCounsel Summit this week in Las Vegas.
“You may think, ‘Valuations are really high. The market is frothy. There are all these buyers out there that are adept at doing deals. It must be easy to go to market. I hope that I can get a good deal just by jumping in.’ It’s not that easy,” said David Selig, CEO of Advice Dynamics Partners.
The deals are very complex, and buyers are not all created equal, he added. Preparation can take years. For example, firms should think about whether generation 2 advisors are properly incented and equitized. These advisors should be locked in so that they stay.
A lot of firm owners assume, “‘My team is loyal; they’ll stay. They’ve been with me for the last 10, 15, 20 years.’ They’re not going to be loyal anymore after you’ve just pocketed $70 million and they’re left doing all the work,” Selig said.
Selig said he recently worked with a seller who hadn’t fully appreciated that. The buyer insisted that the G2 advisors get some equity in the deal, and it became a point of negotiation to get the deal done.
Steve Levitt, managing director at Houlihan Lokey, said the buy side can be very competitive. He knows of about 60 sponsors looking to buy a wealth management platform, 40 of which currently don’t own one.
And it’s expensive, he added. Most firms he works with have between $500 million and $10 billion in assets and command 15-20 times adjusted EBITDA.
“It’s a wonderful strategy to bring in talent, to grow around the country, but it’s not for the faint of heart,” he said.
M&A in this industry is much more evolved than it used to be, said Brandon Kawal, partner at Advisor Growth Strategies. Almost every firm wants to be a buyer, but you have to do a lot of business building before thinking about being one.
“You have to be much more strategic and much clearer on what you’re trying to accomplish through M&A, beyond the numbers, beyond having a splashy headline,” he said.
On the seller side, there’s more prep work and planning that go into M&A, and it requires more thoughtfulness than it did a decade ago.
“Just tossing it out there and saying ‘I’m for sale’ is not the way to drive a premium,” Kawal said.
Strategic M&A is purpose-driven, he said. There should be a real need for a firm to do M&A, whether that’s the expansion of geography, client segment or capabilities.
“M&A as the shiny object—that’s aspirational,” Kawal said. “Strategic is, you can clearly articulate your vision and strategy around why you want to do with M&A to begin with.”
