In today’s M&A-rich environment, many advisory firms are looking to get in on the action. But most would-be buyers and sellers come up empty because of unreasonable expectations.
Of the hundreds of advisory firms we connect with, most consider themselves buyers. They believe they have built a great firm that could be just the “right fit” for a would-be seller.
Similarly, of those sellers who are truly motivated either to sell or to merge with a larger firm, more often than not the principal has a purchase price in mind—and it’s often inflated.
The key to the consummation of any successful transaction is the motivation and reasonableness of all parties.
The Vetting Process
When we vet a potential acquirer, we look at the following criteria:
- Has the firm successfully negotiated and closed deals in the past? If not, why not? And if so, how successful were those transitions?
- Does the firm have a unique and compelling value proposition?
- Why the interest in an acquisition? Is it simply to grow assets or is there a broader goal of building an enterprise and maximizing its value?
- How do they envision structuring a deal? Will at least 20 percent of the purchase price be paid in cash at the time of closing?
- How will they help the acquired firm grow its business? Will the acquired firm grow faster with or without being acquired?
- If they have a history of acquisitions, how have the acquired firms been integrated? What have been the experiences of those firms?
Likewise, when we assess a prospective seller, we look at the following:
- How long have they been trying to find a buyer?
- What are they looking to accomplish?
- Have there been other suitors and, if so, why didn’t the deal close?
- Are they looking to sell and leave the business immediately or do they have a longer runway and want to participate in the growth of the combined entity?
- Are the expectations of the principal(s) realistic in terms of valuation and deal structure?
The way each side answers these questions will be the first determinant of whether a deal will close. For example, say a seller has $500 million in assets under management, annual revenues of $6 million and isn’t profitable. Yet he thinks his business is worth an unrealistic multiple. A deal is not likely to get done. Similarly, if an acquirer with $250 million in AUM is hoping to purchase a firm more than twice its size and does not have a compelling growth story, the deal isn’t likely to get beyond the initial introduction.
The Negotiating Table
A deal often happens when two imperfect firms come together to solve for capacity constraints, succession issues, accelerated growth, expanded geographical requirements, a need for additional bench strength, and an increase in enterprise value. If both sides are motivated to make this deal happen and are coming to the negotiating table with reasonable expectations, things are off to a good start.
Big Money-Making Headlines
In 2012 advisors and industry bigwigs were stunned when First Republic bought Luminous Capital, which at the time had $5.5 billion in assets, as the price ($125 million) seemed to set a high bar for valuations of wealth management firms. Now Luminous has $11 billion in assets, and First Republic recently announced another uber-acquisition of Constellation Wealth Advisors.
In both cases, the deal went through because of motivated parties and well-set expectations. In the recent deal, Constellation’s co-chiefs Paul Tramontano and Jon Goldstein said, “First Republic’s client-centric focus fits perfectly with our values.” And those shared values often close many deals.
Even when everyone involved views a prospective deal as a match made in heaven—with both firms seeing the world the same way from client service and investment perspectives—there isn’t a guarantee that a deal will be consummated. Deal-making is hard.
For instance, we recently spoke with a registered investment advisor with $400 million in AUM who was highly motivated to do a deal. The prospective buyer—a global financial services firm—wanted to buy the firm “on the cheap.” When the first offer came in way under market value, the seller just walked away. Although he was flexible, an offer that low lacked the integrity and reasonableness he needed to close the deal. So the dance continues with other suitors.
Not all firms are suited to merge or be acquired, so finding those key areas where there’s a win-win for both sides is what makes a sale happen. Only then will reasonableness drive the parties to a positive outcome. n