Right now, there are about 40 to 50 buyers to every one seller in the registered investment advisor community. But DeVoe & Company Managing Director David DeVoe believes we’ll have a year—in the not-so-distant future—when there are too many sellers, he said, speaking at the DeVoe 2019 M&A+ Succession Summit on Thursday at New York City's Harvard Club. A group of lenders to the RIA industry agreed, saying that the evolution and expansion of financing options in the space were already driving more sellers into the market.
One of the barriers to getting more sellers into the market has involved internal successions and the affordability of a practice for a next generation advisor. But lenders, such as PPCLOAN and others, have helped junior partners buy equity over time, building it debt-free and getting to a point where they can afford a buyout.
“One of the challenges I think for sellers in the conversations that we have, ‘I can bring on a new partner or look to bring on the next generation as a minority owner, but I’m not really interested in giving them my income or giving them my distributions to ultimately repay me over time,’” said Dustin Magone, managing partner of PPCLOAN, at the DeVoe conference. “So with the availability of capital through lenders like ourselves, these junior partners have the ability to buy in over time, and the sellers that sell 5%, 10% of the firm do a phased succession plan over five to 10 years. They’re able to sell that equity; we finance 100% of that amount.”
This way, the seller doesn’t have to give up a controlling interest in the firm until they’re ready to exit.
Mike McGinley, general manager at Live Oak Bank, says more sellers will be created by allowing them to monetize more of their business up front, while also making sure the risk to the buyer doesn’t increase too much.
“We’ve seen a lot of sellers kick the can down the road, especially with internal transactions, because if they’re holding a note and they’re growing the firm, there’s not a whole lot of reason to give up that equity,” McGinley said. “If they can have a liquidity event and bring it to more of staged type of situation, where they’re going out over time, they’re more likely to move on that transaction.”
Ed Swenson, chief operating officer and founder at Dynasty Financial Partners, believes new offerings, such as his firm’s capital strategies services, will also bring more sellers to the market. Dynasty, for instance, has financing options for liquidity, succession planning, etc., but it will never own an RIA outright. That’s what sellers are looking for.
“I think that brings more sellers potentially into the market, where they don’t have to make the outright decision that they’re selling the company and exiting,” Swenson said. “It can be a phased approach; it can be part of a larger strategic conversation.”
Other sellers, however, simply want to take their cash and leave the business, and lending products now make that possible, Magone said. Prior to 2013, buyers would put 10-15% down up front, with the seller responsible for financing the difference. “There’s a big risk associated with that to that selling advisor.”
Now, with the availability of capital, “We’re seeing a shift in the way these deals are structured, with much larger cash down payments on the front end,” he added. “I think that’s what’s helping some of these smaller sellers—$50 or $100 million, maybe $150 million single-owner firms—saying, ‘OK I’m willing to sell.’
“Buyers can now borrow up to 100% of the purchase price, and the lenders have the ability to also accommodate that downside protection in the form of a look-back through either escrow or bank hold-backs,” Magone said.
Further, more sellers will come to market as buyers become better qualified, he added.
“We have conversations on a daily basis with five, 10, 15 different advisors who are interested in doing acquisitions, but that’s really where the knowledge stops,” he said. “It’s just an interest.”
Buyers don’t understand the dynamics involved in acquiring a firm, such as integrating it into their culture and having the capacity, infrastructure and appropriate people in place to make the transition happen smoothly.
“As buyers themselves become better qualified candidates for those sellers, you will have more sellers in the market,” Magone said
But the responsibility doesn’t all rest on the buyers. For a good deal to occur, it’s also incumbent on selling advisors to make sure their businesses are operating in a way that’s attractive to lenders, said Rick Dennen, founder, president and CEO, Oak Street Funding.
“It’s not, ‘OK, I’ve decided to make the change, and I’m out next week. The relationships are gone.’ I don’t think any one of us are going to fund that deal. It’s got to be a methodical, thought-out transitional process to make this successful for everyone.”