Merger and Acquisition Loans for RIAs: A Consultative Approach

Merger and acquisition activity is heating up in the RIA world, especially with the recent cuts in the Federal Funds rate. A decrease in inflation and a healthy labor market are contributing to confidence in the economy and a willingness for buyers to consider M&A activity.

Recently, Oak Street Funding President Alicia Chandler talked with Michael Belluomini and Jeff Harris of Carson Group, an investment firm advisory company, on their podcast about the current market and what makes Oak Street Funding different as a source of RIA loans. Here’s a summary of topics covered in the conversation. Click here to listen to the complete podcast.

→ Watch Now: Know Your Worth Podcast with Alicia Chandler

Interest rates and the market

Larger players in the M&A market were able to absorb the recent higher interest rates. For small firms or first-time acquisitions, however, those rates put a damper on M&A activity. As rates decrease to a palatable figure, M&A activity is starting to surge.

Extensive experience in the RIA space

Borrowing to finance the purchase of an RIA firm is different from borrowing to purchase real estate or a business with significant hard assets. A traditional lender may not grasp how an RIA firm’s value and revenue streams work. They may question where the collateral is to secure the loan.

Oak Street Funding has been lending for over 20 years, and RIA lending is the largest vertical. “At Oak Street, we have a full team of dedicated lenders and underwriters and processors and a backend servicing team. And all they do is focus on the RIA space,” says Chandler.

Oak Street’s expertise is in lending to businesses with the primary asset being a recurrent revenue stream. The team knows how to value and position it as the collateral for a loan.

“When you talk about how that's different from a traditional brick and mortar bank, we don't have to be educated by the borrower. We come to the space with the knowledge and the expertise of what your clients look like, what your assets are, how you conduct your business."

Consultative approach

Instead of moving the loan through quickly and showing up at closing with a bunch of paperwork to sign, Chandler said clients should expect several questions during the process to ensure they know not only what’s being signed but also that they’re ready for the transaction.

Oak Street Funding’s team prides itself on a consultative approach. From deal sheet to closing table, buyers (and sellers) get to have conversations with their lending team to learn about options for structuring their deal. This approach, combined with a deep knowledge of the RIA industry, allows clients to have a partnership with the lending team.

She said first-time buyers should anticipate the sales and underwriting teams to ask about the reason for the purchase - the why - and the expected synergies between the firms. The lending team wants to understand why the seller is selling and the kind of team the buyer has in place. It’s these intangible types of questions that help to ascertain the likely success of the new venture. For the team, a deal isn’t just a transaction, they want to help the buyer and seller determine if the deal is a good fit long term.

Facilitation of talent acquisition and succession planning

There’s a growing trend among RIA firms to use M&A to bring on talent and identify potential successors. Firms are looking not just to purchase additional cash flow but also to add talent for organic growth, potentially expanding services not currently offered by the firm. New talent can serve as bench strength behind the owner to drive growth.

Belluomini discussed the talent shortage in the RIA space, especially as it affects owners looking to identify a second-generation successor (G2). He said at a recent conference, “I had asked the question, ‘Who here is looking for really talented junior advisors to G2?’ Almost every hand in the room goes up. I mean, that is a major problem we have in the industry. We are not backfilling the amount of advisors that are exiting with really talented young folks.” With valuations running high, however, there can be a significant gap between external value and internal affordability for a younger advisor wanting to move into ownership.

A popular way to bridge that gap is for the owner to sell the business to G2 in tranches. Per Chandler, “So, if a buyer and seller - G2 and G1 - want to do 5% year one, 5% year two, and so on, we can fund those tranches on an annual basis until it gets to a point where perhaps they want to do a total buyout.” She noted that deals can be structured in other ways as well, including splitting the purchase among multiple junior advisors who all want to buy in. In her words, “Every situation's unique, but we can handle it all and we're happy to take a look at those different situations,” says Chandler.

Closing tips for younger buyers

Chandler stressed the importance of young buyers talking directly with their G1 to make their interest in ownership known. Oftentimes, she noted, the owner is looking for a successor but may not have verbalized that fact. It’s “incumbent on you to go ahead and have those honest conversations. It's all about having those open and honest conversations early and getting those plans put in place,” says Chandler.