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RIA M&A: What’s Driving the Best Deals?

Not all firms participate equally in the M&A frenzy. Successful firms—both buyers and sellers—share these characteristics.

RIA M&A is teaching us a lesson. In a painfully competitive market for buyers and an increasingly saturated market for sellers, it takes more to separate from the pack. Access to capital and an interest in growth is not enough to be a successful acquirer, and sellers can't simply hang up a for-sale sign and expect fantastic results.  

The 2022 RIA Deal Room Report, sponsored by BlackRock and slated to be released in the spring, will dive beneath 2021's eye-catching M&A headlines to evaluate what it took to get a deal done. The number of transactions in 2021 set a yearly record and the early RIA Deal Room research points toward another double-digit percentage increase in median valuations.

It's easy to conclude that buyers are paying higher premiums than ever, and more owners are putting their firms up for sale to take advantage of the pricing. But when you ask the right questions the numbers tell you more.

Why are firms known for making acquisitions having more success with transactions than smaller, opportunistic players? Why do some sellers command premiums above and beyond their counterparts? Surprisingly, the answer is the same for both buyers and sellers—the firms with the best stories win.

Both acquirers and sellers must paint a compelling picture to stand out from the competition. The same equation that wins acquisitions creates an avenue to sell at a premium valuation. The stories of successful RIAs reveal expertise in three areas: Organic growth, employee engagement and platform and service strength. 

Organic Growth Engine

Strong stock market performance and inorganic growth activities can mask a critical underpinning of value – the net new organic growth metric. Achieving sustainable organic growth is not an option;  a firm that relies on market performance to disguise net outflows from client attrition or the drawdown of funds is not a sustainable business.

Buyers: The market rewards buyers who have a durable growth engine that can be applied across geographies by penetrating attractive growth channels.  Aspiring acquirers must demonstrate an ability to help others grow at an increased rate compared to their existing state.

Sellers: The market favors those with consistent organic growth.  This growth is measured net of the market (versus absolute) and reflects new client acquisition and favorable client demographics. Higher growth drives higher valuations. Additionally, a seller's perceived optionality (due to less risk and more upside) and additive qualities drive buyers to bid more competitively.

Employee Engagement

Now that remote work is a viable option for many wealth management firms, talent is more mobile and more easily drawn to platforms with compelling growth stories and career trajectories. RIAs are responsible for developing next-generation talent and the best RIAs are creating attractive homes for talent by offering clearly defined career paths and development opportunities. 

Buyers: The most successful buyers easily communicate how talent does exponentially better on their platform versus the best alternative.  This can sway potential sellers as they consider the ideal long-term solution for their talented teams. The substance is a well-crafted approach to career development, compensation and influence. 

Sellers: The market rewards sellers with a compelling bench. Acquisition brands publicly express their desire to build depth through talent acquisition. Potential sellers or partners that expand a partner firm's depth and geographic or demographic reach will receive a premium over counterparts that cannot.

Platform and Service Strength              

The competitive bar is rising for all wealth management firms. Differentiating from the pack is increasingly difficult as clients seek more value for their fee. The most prominent platforms have implemented a broad array of services that create "one-stop-shops" for end-investors. Increasing platform breadth allows those same platforms to add value to potential sellers and talented professionals instantly.

Buyers: Sellers often favor buyers who can offer their clients an expanded service offering or streamline back-office operations. This dynamic has become more acute in recent years and helps contribute to the rise of acquisition brands. To effectively compete, potential buyers must demonstrate their value-add philosophy that will engage both clients and the next generation of employees.

Sellers: Buyers respond favorably to a well-established platform because it builds confidence in the firm's ability to grow without sacrificing client service.  Additionally, sellers with a thoughtful approach to niche clients, value-added services or a segmented approach have a unique story for growing/adding to a platform. An established platform that drives niche service separates a seller from the pack in terms of valuation and fit.    

The Story Matters

When you look past the headlines, the increasing levels of M&A have not guaranteed all participants the same outcome. The market ascribes higher value to growing firms with loyal talent and scalable, niche offerings.  Acquirers want to buy these firms and sellers want to join them because they offer greater optionality for clients, employees, and principals. Additionally, these three areas of focus have a tremendous application to RIAs aspiring to remain independent and grow the reputation and value of their firm.  The RIA industry must stay diligent and learn from M&A as a leading indicator of the shifting competitive balance.

Brandon Kawal is a principal with Advisor Growth Strategies, an RIA management and transaction advisory firm.

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