While I didn't start out as a deal-maker in wealth management, I have found it to be a dynamic, fast-paced, exciting and fulfilling role in my nearly 20-year career as an executive at Mercer Advisors, currently a $15 billion independent registered independent adviser. I'm often asked my thoughts on what makes a good deal, how to navigate the many nuances of buying and merging practices, and how to best select potential partners.
So after recently completing our 21st deal, here are my best ideas, thoughts, suggestions and lessons learned.
1. Pricing. There are always tradeoffs involved, and price is one of them — you don't want to go for the highest price and then be unhappy with your new partner. The sale price is broken down into "closing consideration" and earn-out. Closing consideration is typically around 60% of the total purchase price paid at the close of the transaction, with the 40% balance paid over a two-year period based upon revenue and/or net income retention.
The industry uses three different valuation techniques: discounted cash-flow analysis; multiple of net income or EBITDA; and multiple of top-line revenue. While I've used all three methods, most deals are reviewed under both a multiple of net income and a multiple of top-line revenue.
2. Target markets. Identifying your geography is important. You want to be in or near major urban markets, because that gives you the opportunity to grow substantially. You don't need to break into a new market because you're already there. You already have a good reputation and a team assembled, you operate a going concern with established cash flow, and you have local intelligence on the unique needs and wants of that strategic market.
3. Deal terms. Of course, terms for deals are very specific to the situation, but common themes do emerge. These include providing a reasonable valuation; describing what the seller/founder's "life after sale" role will be and establishing reasonable compensation; defining which staff are staying and understanding whether there will be role redundancies; and helping staff know what their role will look like at the acquiring firm and what they want their career path opportunity to be.
4. Timeline. Time is the greatest enemy to deal success — the certainty of closure is greatest with a shorter process. Sellers need to understand the mechanics of a sale process, and educating them about the steps involved is critical so they stay committed and don't get distracted.
Typically the flow is:
• Letter of Intent (LOI).
• Due diligence.
• Signed purchase agreement.
• Seller consent letter goes out to their clients notifying them of the sale.
• The deal closes 45 days from the date the consent letter is sent.
• The seller is paid closing consideration (roughly 60% of purchase price).
• Integration of seller firm into Mercer Advisors begins (takes about a year to complete).
5. Seller mindset. Sellers care about three things: receiving a fair price for their business; making sure their clients are taken care of; and ensuring that their staff stays and that they have career path opportunities. Don't waste a seller's time: Shoot straight and be brutally honest.
Additionally, most sellers are not looking for an exit; they are looking to offload operating responsibility and de-risk their personal balance sheet. But they want to continue their careers after they get rid of the back-office activities they all dislike. Given the 10-year bull run and frothy pricing, most sellers understand this is the time to sell.
6. One voice. Too many voices speaking for one buying entity creates confusion for the seller and introduces unnecessary complexity and possible inconsistency. While you want to reduce the number of voices inside the seller's head, we have a great team at Mercer, so you want to introduce them where it's accretive.
7. Manage emotions. You have to be able to walk away from any deal. Do not become emotionally invested. Some of the best deals you do are the ones you walk away from.
8. Growth and people. Organic growth matters. It shows that consumers are buying into the business model and that the seller can grow with you. M&A also adds CFP capacity and professional capability (attorneys, CPAs, CTFAs, adding/augmenting tax services, estate planning). In a talent-starved industry, this is just as valuable as AUM and revenue.
9. Financials. Some sellers don't understand capitalization of income. Some sellers view their business as their baby and think what's left over after they pay the bills is theirs. They need to understand that "what's theirs" is broken into two parts: reasonable compensation for the job they do, and the rest is authentic profit.
Determining "reasonable compensation" for the seller is the hardest conversation you have in any sale process. You need to agree on what the seller's reasonable compensation is before you can determine the profitability of the RIA. Financial statements are a reflection of the seller and not just about the numbers, and poorly reported and disorganized financials are a red flag.
Dave Barton is vice chairman of Mercer Advisors.