Finding the right candidate for an M&A transaction

The right merger, sale or acquisition can be a game-changing event for an advisory firm and is one of the fastest ways to create transformational change for an organization. A critical success factor in this process is a firm’s ability to identify the ideal candidate with which to combine. Developing a target profile, which details the screening criteria for potential candidates, will not only help ensure you find the right fit, but will also make your prospecting process more efficient.

The target profile should be tied closely to the firm’s business strategy, which will essentially drive the criteria for the profile. Advisers should think strategically about the future of their organization and how a merger, acquisition or sale can accelerate the achievement of their business goals. This thinking will then be used to create the six key criteria of the target profile:

1. Size: Determine a specific range for the size of the targeted firm (assets under management is probably the best metric, for simplicity sake). If acquiring, an adviser needs to not only consider the upper end of the spectrum, which is generally driven by the amount of capital that is available to be deployed, but should also determine a floor, or a minimum size below which it isn’t worth the time and energy to negotiate and close a potential transaction. Not doing so will expose the adviser to the potential of wasting time vetting inappropriate organizations.

Similarly with a sale, advisers will want to consider the implications of selling to institutions of various sizes. Larger organizations will likely provide more capabilities and have greater resources; smaller organizations can enable the selling firm to better maintain its culture and potentially have more control of the combined entity.

2. Geography: Identify a specific geographic area for a potential future partner. This criterion should be driven by the strategic imperatives of the company that intersect with its M&A strategy. For example, if an organization is focused on increasing profitability and seeks to optimize its cost structure, then a local adviser may be the best candidate for a transaction. By contrast, a firm seeking to leverage its brand and network to expand its market would benefit from a regional focus. A national footprint could be appropriate for an organization that is focused on leveraging its current infrastructure, brand and/or capabilities for broader distribution (or in the case of a seller, is agnostic to the headquarters location of the acquiring firm).

3. Business model/services: This screen comprises 1) The business model (e.g., wealth manager, money manager, financial planner) of the target organization, and 2) the services and capabilities (e.g., financial planning, estate planning, alternative-investment expertise) that would be a valuable asset in a partner firm.

Generally the acquirer and target will be of the same model for RIA-to-RIA transactions. In some cases, however, a cross-model transaction can unlock strategic value. For instance, a money manager that seeks to evolve into a wealth manager could partner with a financial planner or wealth manager to achieve this goal.

If a firm plans to add a service, such as estate planning, or deepen its financial planning capabilities, a potential M&A candidate with these assets has the potential to be a powerful strategic fit. This is a clear case of 1 + 1 = 3.

4. Investment philosophy/investment products: Articulate the investment management attributes and product solutions required in the targeted firm. Alignment of investment philosophy is critical: it wouldn’t make sense for a company focused on asset allocation via exchange-traded funds to combine with an organization that seeks to outperform a benchmark with individual equities (unless the former is actively seeking to add this capability, perhaps in an effort to develop capabilities in a given asset class, for example).

Related, but separate, are the investment products used to achieve the investment strategy. A firm should include all of the products (e.g. ETFs, mutual funds, separately managed accounts, etc.) that could fit within the combined firm’s future product set.

5. Staff capacity and other human-capital needs: The most commonly overlooked screening criterion is staff capacity, or whether the adviser currently has too few or too many clients for its staff. An ideal merger or acquisition is one in which one firm’s capacity issues are offset by the other’s: Firm A is straining to manage 120 clients per professional; Firm B has excess capacity and only 40 clients per professional.

Completing this section should also include an assessment of certain roles that are currently lacking in the firm (e.g., business development manager, chief operating officer) and whether a successor would be of value. Clearly, an organization with these capabilities would create strategic value.

6. End-clients: Investible-asset size of the end-client is another key screening element. The primarily goal of this criterion is to screen out organizations whose end-clients require a business model or capabilities from the subject firm.

The development and documentation of the target profile will provide much greater clarity as to what the adviser seeks in a future partner. These six criteria also create a simple “cheat sheet” that can be used formally or informally in the search for prospective partners. The target profile can be sent to centers of influence to ask if they know of firms that fit the profile. Or, it can be reviewed prior to attending an industry event to have the criteria top of mind while mingling with advisers. Most importantly, the process of developing a target profile helps ensure that the strategic goals of the organization are tied intimately to the M&A prospecting activity and the potential for a truly transformational transaction.

David DeVoe, former head of Schwab Advisor Services’ M&A consulting business, is managing partner of DeVoe & Co., an investment bank and strategy consulting firm serving the wealth management industry.