If you are an advisor looking to monetize your firm or book of business, you are belle of the ball — and it’s become a big ball. Take your time to get aligned and understand your options, but don’t forget that there is a pace and a rhythm to the dance.
If you want to become a serial acquirer, you have tough competition from private equity-backed buyers, so you need to have a strong value proposition. That means a model and deal structure that are attractive to the sellers who have objectives other than getting top dollar for their firms.
There was a time, not too long ago, when dealmaking in the independent RIA space, and the presence of private equity, were nearly unheard of. Everything is different now — the level of sophistication of the buyers, a deluge of deals and lending capital, and the complexity of the offerings and deal structures have changed the game.
These days, as soon as you show some interest in selling or demonstrate steady business growth, corporate development people will knock down your door. Just as it’s most often best not to blindly jump into the arms of your first romantic suitor, my first piece of advice is to not take your first deal offer. While attractive, those early offers are meant to prevent you from taking the time to get clear on your objectives and run a competitive process to see exactly what you're worth and what deal terms you might achieve with a little more legwork.
More Competition and Complication
Not too long ago, deals were simpler, and cash was king. Your typical acquisition deal had a 25% to 33% down payment, with the rest paid out over several years subject to retention. Now that private equity players are part of the landscape, fueling serial acquirers who can close 20 or more deals per year, we are seeing deals with up to 70% down payments. And most deals now use buyer equity, not just cash, as currency.
As the industry matured, and firms received private equity investment — sometimes even second or third rounds — the value of the acquirer’s equity increased. The equity component on deals can be as low as 10%, but more commonly it’s 20% to 30%, or even up to 50%.
Acquirers want you to help build and grow the firm, and they want your economic interest aligned with theirs. They promise a "second bite of the apple," hoping to exit at a higher multiple in the future based upon their larger size.
If you are a seller, ask yourself if you really want that second bite. I advise clients to think of the equity portion of a deal as a completely separate transaction.
Let’s say your deal consists of 80% cash and 20% equity. You should look at it as if you received 100% of the purchase price in cash and then chose to invest 20% of that cash into the acquirer.
