RIA Mergers and Acquisitions: Vital Signs are Strong

Anyone taking the pulse of mergers and acquisitions in the RIA market will discover there’s nothing weak or thready about it. Activity is robust. To provide insights on the current market, Oak Street Funding President Alicia Chandler and Vice President of Strategic Markets Susie McEuen participated in a recent webinar with Eric Leeper and James Fisher of FP Transitions.

Bottom line - not only is the market strong, but some interesting trends are emerging.

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Strength of the Marketplace

Fidelity Wealth Management describes the RIA M&A market as “vibrant,” and says July 2024 is the strongest July on record. In the webinar, Fisher echoed that finding. “There’s no sign of the demand slowing down.” He went on to say they are seeing 65 or more inquiries for every opportunity they have, and in some cases as many as 100 inquiries.

Strategic Acquisitions

“I am seeing buyers be a bit more strategic about the opportunities that they are pursuing,” said Fisher. “They're not out there just pursuing, or acquiring opportunities, just to acquire them.” What buyers are doing is making acquisitions with a specific aim in mind. This approach is primarily driven by a bit more caution on deploying capital given the current interest rate environment.

Acquiring Talent

One growing trend is investing in talent. Where a firm might have recruited one or two high performers in the past, now the firm owners are purchasing other entities in order to bring on a whole team. Buyers may take this approach when they want to expand into a new practice area and are looking for an established team with the expertise they need to be competitive.

Creating Paths to Partnership

Another emerging trend is the growth of creative approaches to building partnership opportunities. In part this trend is driven by necessity, as older owners retire, and younger associates simply cannot afford to purchase their substantial books of business.

When small- to medium-sized firms purchase these practices, according to Jeff Gonyo, writing in WealthManagement.com, they can provide options to alleviate the financial burden on younger advisors while preserving the value of the exiting owners’ books of business. Creatively structured deals that include minority equity holdings make it possible for younger associates to gain a toehold in ownership, which they can expand over time.

More and more deals are involving equity stakes, which is changing the face of partnership. Many acquisitions are taking the form of Sell and Stay^® where the seller doesn’t immediately exit the firm but stays on with a minority ownership interest, a long-term employment arrangement, or some combination of the two. These arrangements have the added benefit of promoting continuity and reducing client loss in the transition.

Nearly all sales involve some type of seller note, as well. While seller financing isn’t a partnership arrangement per se, it does serve the purpose of keeping the seller and buyer interests aligned for an extended period. Lenders are always happy to see the seller keep some skin in the game because it’s good for the business and protects the collateral of the buyer’s loan – the cash flow of the business.

Choosing the Right Partner

No matter what form the seller/buyer arrangement takes, choosing the right partner is critical to success. “It goes a lot smoother when the two parties together have the same philosophies,” stated McEuen.

If a buyer and a seller aren’t in alignment about how to operate the business, there will likely be trouble ahead. Crucial team members may not stay. Clients may leave. No one – from the buyer to the seller to the lender – wants to see that outcome.

Chandler says that as a lender, Oak Street Funding watches for this alignment between sellers and buyers/borrowers. “They’re growing in the same direction,” she says. When the seller has an equity component, that’s even better, because “the seller is incentivized to continue to produce, continue to retain those clients, and grow that client base.”

Fisher says his company always advises clients to look for partnerships that focus on the interests of three main stakeholders – partners/shareholders, employees/team members, and clients. If the buyer and seller aren’t aligned in how they value and approach these stakeholders, the post-sale organization isn’t going to perform optimally, and that’s a concern to all the stakeholders as well as to the lenders.

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Making the Deal Happen

It’s always valuable to work with a team of professionals to help put together a deal. At minimum, a company’s attorney and accountant should be involved, but bringing an M&A advisor and a trusted lending partner into the process can make it all go much more smoothly. Making a business acquisition takes time. It’s not like buying a car or buying a house, so starting conversations with these team members early is important.

For buyers and sellers, financials need to be in order. At least three years of audited financial statements and tax returns are the norm. Many deals get bogged down by buyers and sellers not having this basic paperwork ready. That can slow down or even thwart a deal if either party feels the other is disorganized.

A seller who has spent a career building a business isn’t going to feel good about selling to someone who can’t meet a lender’s deadlines. Repeated slowdowns can cause what Fisher calls “deal fatigue,” sometimes causing a deal to fall apart.

There are many ways to put together a deal that will work for all parties involved. Look for lenders that have the flexibility to create solutions – from business acquisition loans to succession loans to partner buy-in loans that match the needs of buyers and sellers alike.

Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.