RIA sellers advised to clean skeletons out of closet before approaching buyers

A more challenging M&A market triggers creative deal structures, more due diligence and selective buyers, according to panelists at the MarketCounsel Summit.

Merger-and-acquisition experts say that higher interest rates and falling equity markets aren’t slowing the pace of deals, but that deal structures are getting more creative.

“The structures are starting to look like they did three or four years ago with both buyers and sellers sharing the risk,” said John Furey, managing partner at Advisor Growth Strategies.

Furey was part of a panel discussion Tuesday at the MarketCounsel Summit in Las Vegas that examined the changing dynamics of registered investment adviser M&A.

Brandon Kawal, principal at Advisor Growth Strategies, kicked off the session by presenting his latest research on M&A trends, which showed that buyers expect to complete an average of nine deals next year, but that the “foundation of M&A is different than it was a decade ago and is different than it was five years ago.”

“Activity is up, and more sellers are inquiring, so there’s more deal flow from an inbound perspective and buyers say they plan to keep moving,” he said. “But buyers are being more selective with how they’re doing deals and where they’re deploying capital.”

Kawal said the top priorities for buyers are a solid cultural and operational fit, while a history of organic growth is still in demand, and talent remains a top differentiator for firms being acquired.

“I don’t think people make it through the first couple rounds if it’s not a good cultural fit, and I think deals are taking a little longer,” said Arthur Ambarik, chief executive of Perigon Wealth Management

Kawal is also seeing more creativity around deal structures to help sellers justify doing a sale with the price pegged to assets under management during a down market cycle. He said closing payments are still high but consideration is being pushed out further to allow sellers to recoup some proceeds in the event of a market recovery down the road.

“We don’t see buyers offering less than we have in the past on quality transactions,” said Hoyt Stastney, general counsel and head of M&A, Wealthspire Advisors. “Valuation-wise, we are shifting more of the payments from upfront to later in the process, but we’re staying pretty consistent in what we’re offering.”

Buyers say the flow of potential sellers hasn’t slowed but buyers are getting more selective.

With that in mind, Kawal said sellers can’t be as selective as they could have been just a few years ago.

“We’re seeing more emphasis on balance in deal structures,” he said, citing the fact that buyers are passing on 60% of potential acquisitions.

“You used to be able to send a suboptimal advisory firm to a certain buyer and they would get a bid,” Furey said. “That is gone now.”

For owners looking to put their firms on the market, Furey advised a thorough housecleaning because the due diligence has become more stringent than ever.

“If you have skeletons in the closet, you need to clean them up,” he said.

But current interest rates and equity markets aside, Ambarik said there is nothing long term that will derail the pace of RIA M&A.

“M&A is only going to pick up,” he said. “There are more buyers and more sellers every day.”

In terms of entering the space as a seller, Stastney advised against taking a casual approach.

“Understand your narrative and how it will be received by a buyer,” he said. “If you’re not who you want to be as an adviser, get there before trying to make a deal. The trust element is so huge in a transaction.”