Given the oft-cited graying of the RIA industry, many advisers seek to monetize their businesses and provide continuity for their partners and clients alike. Acquisition negotiations raise numerous difficult issues, but a threshold hurdle is how much a prospective acquirer believes an RIA is worth versus the owner's perception of its market value.
Every situation is different, but we are prone to place a higher value on an acquisition candidate when:
The firm is fast-growing. RIA owners are sometimes disappointed when we are not more enthusiastic over the total AUM on the books. Client assets and scale are hardly unimportant, but more critical is the speed of growth. It is common to speak with firms whose growth stalled long ago and whose principals have done little more than pursue a rearguard action to replace lost business. Robust business growth warrants higher multiples. Slow or no growth raises uncomfortable questions.
The owners are prepared to receive reasonable compensation. Many principals withdraw a large share of their firms' earnings each year. There is nothing inherently wrong with distributing earnings, but many principals view this as compensation. Like any owner who acquires a business, we expect a profit margin. Principals may need to accept lower total compensation so the business can provide an acceptable profit and justify a higher valuation. For some principals, agreeing to a “pay cut” is difficult, especially if their lifestyles would be noticeably affected.
The RIA's account base and ours match up. When we evaluate an acquisition, the median account size matters more than the number of accounts. Accounts whose size resides outside our business model may prove an administrative burden with unattractive margins. We don't expect each of our acquisition prospects to match our metrics — a stated minimum $5 million and a median above $13 million. Straying too far from our sweet spot can be detrimental to both sides of the transaction.
The RIA owners wish to be long-term partners. We acquire RIAs only on the condition that the principals actively service their existing clients and want to help us build long-term enterprise value. Without participation by at least some lead principals, the clock is likely to count down on long-established relationships. For a similar reason, we shy away from brokers, even if they continue to service their books of business. Unfortunately, many brokers appear to be habitually on the lookout for the next resell opportunity. From our perspective, “renting” AUM from an adviser is rarely a winning proposition.
Principals are prepared to assume new roles. It isn't easy for owners who have functioned successfully as chief executives or chief investment officers, or in multiple other roles, to relinquish these responsibilities post-acquisition. We favor principals open to assuming other important client relationship, investment and operational roles within our firm. Occasionally, principals cannot envision themselves in a different role and it generally is best to discontinue negotiations.
The RIA has nurtured a strong second generation. We value acquisition candidates that have developed a proficient and highly motivated second generation of professionals. We take seriously our obligation to provide these individuals with credible career opportunities. Sometimes, unfortunately, some members of the second generation have weak credentials or limited business experience or have worked almost exclusively with modest accounts. These issues have to be dealt with prior to an acquisition moving forward.
We are often asked how we ascertain whether an acquisition candidate will be a cultural fit within our firm. This is critical. We usually know quite quickly during the negotiation discussions. Within one or two meetings, we'll discern if the owners are enthused by the prospect of becoming long-term partners, sustaining relationships with their clients and building a business with us; if they can visualize a valuable role for themselves within our organization; if they are comfortable with the economic realities of our business; and if they seek to share a strong sense of camaraderie. It also becomes apparent whether they engage with us in a straightforward, respectful manner that allows for true give-and-take. If these attributes are evident, we can be quite certain that their culture and ours will meld just fine.
Richard Hough III is chief executive officer and president of Silvercrest Asset Management Group, an independent investment advisory and financial services firm.