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Questions From New RIA Owners About M&A: Part 2

Firms with similar business, client-care and investment philosophies are usually more amenable to negotiation and constructive compromise than firms with widely different views on these priorities.

As we continue our survey of top M&A questions we’ve heard from RIA owners, we move past planning into the realms of experience, execution and post-transaction.

Continuing on, from Part 1.

  1. What is an optimal consideration mix for an M&A deal?

In M&A terminology, “consideration” refers to modes of payment—typically, cash, stock or a blend of the two. In practice, achieving a price and consideration mix that’s agreeable to everyone involved is a balancing act, and every bit as much art as science.

The consideration mix of a particular deal will be influenced by culture, sell-side motivation and deal type.

  • Culture: Firms with similar business, client-care and investment philosophies are usually more amenable to negotiation and constructive compromise than firms with widely different views on these priorities.
  • Sell-side motivation: Where a founder is looking for a significant liquidity event tied to a sale, a deal that favors cash is likely to meet with approval. Again though, negotiation around payment timing is easier where the firms are culturally aligned.
  • Deal type: Imagine an RIA that’s working on a deal to position the next-generation for leadership. By and large, it’s expected that present leadership will seek to optimize the cash consideration, while the successors will, at least initially, be more interested in minimizing the amount of cash they have to spend or borrow.
  1. How many M&A transactions has Dynasty closed?

From its inception over 10 years ago, Dynasty has been helping firms in its network execute M&A deals. Coming off a record 2020, and now with full capabilities from originating transactions to seeing them signed and sealed, Dynasty has executed 18 deals involving more than $7 billion in assets under management—with more deals in store.

  1. What are some red flags to watch for in doing due diligence on an M&A prospect?

The first one, again, is cultural affinity. Firms that aren’t on the same page when it comes to working with clients, treating staff members with respect, re-investing in talent, and sharing like minded views on investment philosophy aren’t building on a firm foundation.

Similarly, a firm led by a team of venerable and long-tenured advisors may in fact have older clients. Where over-age-60 clients predominate, the parties may have trouble agreeing on the firm’s present value due to natural client attrition.

Is the target firm too levered or trying to squeeze every dollar, even when doing so may lead to inefficiency? Again, the parties’ view on its value may differ markedly.

  1. How do you originate qualified leads?

Lately, we have had success qualifying leads through several targeted digital marketing campaigns for clients. We harness the unique value proposition and identity of our clients and market to a specific target market where advisors and other RIAs might be interested in learning more. We also work with the usual suspects of the recruiting industry, which includes a variety of third party intermediaries, including business brokers, recruiting firms and marketers.

Meanwhile, as word of mouth from our clients’ success in M&A spreads, RIAs approach us, looking for advice on how to efficiently monetize their ownership.

  1. After closing, how can I be sure the transition and/or integration goes as planned?

For starters, it pays to be organized in the sense of having an achievable transition plan that makes sense from start to finish.

Is the acquired RIA meant to function as a standalone practice, or is it slated for integration? Where integration is the aim, is jettisoning your investment team in the cards? Are the acquirer’s investing operations a suitable replacement? Or will you go outside to create efficiencies in your investing program linked to your newly increased scale? The same goes for other in-house specialties, including any third-party or in-house technology and accounting platforms.

In all cases, a detailed transition plan, agreed to before the deal closes, can help see your practice through the realities of a successful post-M&A transition.

Harris Baltch is Head of M&A and Capital Strategies for Dynasty Financial Partners.

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