Merger and acquisition activity in the advisory industry has been strong. Yet, for all the enthusiasm and momentum, many RIAs who want to implement a firm purchase or sale are not moving forward.
As indicated in Dimensional Fund Advisors' 2020 Global Advisor Study and in our interactions with advisors, there are relatively few advisors (16%) who say they have a defined strategy for executing an M&A transaction. Uncertainties — particularly among sellers — in three key business areas often form barriers to a smooth M&A process: change of control, client experience and employee impact. Let's consider each:
Business Control
The two most common deal breakers for advisors are lack of investment philosophy alignment (83%) and cultural fit between firms (82%), according to the study. Looking deeper, we often find that owners are concerned about maintaining control or influence in these areas after the transaction.
I often ask business owners, "If you had every resource available to you, what would you want your daily activity in the business to look like post transaction?" Their responses often reveal the level of business control they want. This preference does not apply only to an external partner.
A large RIA recently said the firm's internal succession discussions were stalled due to a lack of clarity on the level of control the selling advisor wanted after the initial transaction. The control requirement can present an emotional landmine, and a purchaser may acquiesce out of respect for the seller or concern for the deal.
The risk is that the buyer may never fully realize autonomy for the financial investment if the seller continues influencing the day-to-day business. Ongoing and candid conversations prior to finalizing an agreement are imperative.
One seller we often see is the "reluctant CEO." Clearly, most successful owners have developed multiple business and leadership skills. Yet, as CEO, they must devote time to activities they consider unfulfilling or time wasters.
Their main priorities are to serve clients and build a revenue stream, and so many leaders would gladly shed certain responsibilities, such as sourcing talent, selecting technology or managing compliance.
As a former COO, I would suggest that preserving and managing revenue are just as important as driving it. But by recognizing capacity constraints and determining where to add the most long-term value, you can clarify essential areas of business control.
