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With the challenges associated with organic growth, many registered investment advisors (RIAs) are turning to external mergers or acquisitions to expand their practices. Nonetheless, with the market for RIA mergers and acquisitions tilted in favor of sellers, buyers must prepare carefully when pursuing an RIA. In this article, I highlight five important steps firms looking to purchase an RIA can take to achieve their goals. For a step-by-step guide to buying an RIA, click here.
First, prospective acquirors must pinpoint their goals for acquiring an RIA. Among other things, buyers may seek to purchase an RIA to scale their practice, acquire more clients, expand their product or service offerings, and/or acquire talented personnel. Whatever the goal, advisors can save time by focusing only on those opportunities that are best for their objectives.
Second, purchasing advisors should be in a financial position to take on another practice. If the acquiror does not have sufficient cash on hand to consummate a purchase, the acquiror should ensure that it has access to readily-available financing sources to consummate any acquisition. An acquiring firm should also clean up its balance sheet and ensure that it is in a good financial condition. Selling advisors, particularly those looking to grow their practice through joining the acquiror’s team, will want to ensure that the acquiring firm is financially stable.
Third, acquirors must have the operational infrastructure, products, and/or services in place that will attract the types of sellers they are targeting. Acquirors that provide operational flexibility, an open architecture, and a multi-custodial platform are more likely to attract advisors looking to join their practice.
Fourth, acquirors should retain a team of advisors designed to support the acquiror through the process. This may entail retaining an investment banker or consultant to assist the firm in understanding the market for the sales of RIAs, identifying potential acquisition targets, valuing potential selling firms, preparing acquisition proposals, and negotiating terms of a potential acquisition. The acquiror should also retain an attorney well-versed in RIA mergers and acquisitions. This attorney will assist with due diligence on the selling firm, advise the acquiror on how to structure the transaction to best achieve the acquiror’s goals, and draft, review, and negotiate key documents for the purchase transaction. These documents could include – depending on the transaction – non-disclosure agreements, letters of intent, purchase agreements, and employment agreements. For an article that discusses the steps and documents involved in an RIA merger or sale, please click here.
Fifth, acquirors should have available sufficient resources and personnel to coordinate and assist with the integration of the acquired firm following the transaction. While often underestimated, integration of an acquired firm following the close of a transaction is a significant factor in determining the overall success of the acquisition.
Post-transaction integration often requires a significant investment of time and resources. Transition of client accounts, fee billing arrangements, operational workflows, restructuring of employee teams, training employees on new policies and practices, and other factors can take anywhere from 12 to 18 months after the closing of the purchase transaction.
In summary, an RIA seeking to grow through acquisition of another practice should ensure it is properly prepared to explore and consummate a purchase transaction. Taking the steps described above will significantly increase the likelihood of success when pursuing such a transaction.
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Richard Chen is a managing partner with Brightstar Law Group, a law firm that serves investment advisory firms by providing proactive business-minded solutions pertaining to corporate and securities law-related matters. Among other things, our firm provides counsel with respect to securities and compliance matters (including representation in SEC examinations), private fund formation, corporate formation and structuring, business transactions (including M&A and joint ventures), contract drafting and negotiation, employment law matters, operational due diligence, and succession planning. For more information, please visit our website at www.brightstarlawgroup.com or call us at 917-838-7398.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.