How M&A 'Merge-Ins' Can Enhance RIA Deals

External sales entail an advisor — not previously associated with the seller's practice — acquiring the practice from the seller. Intuitively, the external sale does not yield the same seller benefits as an internal sale.

Yet it boasts one crucial benefit: external buyers commonly are well-heeled business owners with a strong personal and practice balance sheet that is required to obtain bank financing that can fund the seller's liquidity event at close.

Rise of the 'Merge-In'

A merge-in M&A transaction brings an external and internal advisor(s) acquiring the practice together. Frequently, senior and junior advisors seek the advice of an investment banker to identify a suitable external acquirer.

After a suitable external buyer has been identified, the internal and external advisor retain bank financing as a co-guarantors. A merge-in provides benefits to all M&A participants.

Seller benefits include:

• Liquidity at closing via bank financing at attractive multiples;
•  Ability to maintain trusted internal advisor to steward the investment model and service philosophy; and,
• External buyer's tenured experience to co-manage the firm going forward.

Internal buyer benefits include:

• Opportunity to gain an equity stake in the practice that may have been otherwise impossible;
• Right of first refusal to acquire the aggregated practice when the buyer retires; and,
• Ultimately creating a larger enterprise ownership opportunity long term for the junior partner.

External buyer benefits include:

• Ability to acquire a practice that may not be available to an outside acquirer acting alone;
•  Junior partner with tenured relationships with existing clients to ensure client retention; and,
•  Junior partner to handle to day-to-day operational functions of the practice.

Historically, according to David Grau Sr., founder and president of FP Transitions, only two- percent of independent and registered investment advisors appreciate a liquidity event at retirement.

With the emergence of new, innovative deal structures — like a merge-in — and access to capital, that percentage may increase to resolve the dislocation between attractive demographics and low seller participation.

Scott Wetzel is CEO of SkyView Partners, which focuses on financing and investment banking needs of RIAs and independent financial advisors. It provides advisors guidance and capital for succession, M&A and existing advisory loan financing.