What firms need to know about M&A in today's landscape

We’re currently living in a time of uncertainty – one in which market volatility and a world pandemic have people, understandably, asking a lot of questions. Given my focus on mergers and acquisitions in the wealth management industry, two of the questions I’ve heard many times in the past few weeks are “What does market volatility mean for the M&A landscape?” and “What should potential sellers be thinking about?” Here are a few key considerations for firms going forward in this environment.

What does market volatility mean for M&A?

First things first: It’s important to understand that the drivers of M&A remain the same despite market volatility. While the circumstances have certainly changed, firms are still looking at M&A as a strategy for meeting their increasingly complex business needs. 

Especially in this environment, there’s a desire on the part of many firm owners to recalibrate their time to focus on strategic business decisions rather than operations. M&A continues to be a logical choice for firms looking to build more sustainable platforms with improved technology to help provide a better client experience and scale more effectively. What’s more, a lot of M&A activity has largely been focused on talent acquisition of both advisers and executives, and that’s not expected to change. Firms are still looking for talent as aging advisers plan succession strategies and pave pathways to growth for younger talent.

Firms can expect that capital will remain in the space and continue to reshape it. Large, well-funded private equity players have recognized this business for its steady cash flows, continued growth and value offered to investor clients.

Even with the changes happening around us, these elements have shown no sign of slowing down, so, in turn, we can expect M&A to continue in the long run. What’s more, sellers who were previously slow to act on a deal may now find themselves considering their options more seriously. As a result, we may see firms that have been contemplating a deal decide to move forward.

That said, the uncertainty around us will likely affect the number of deals happening in the near term as firms digest the impact of the market declines and the COVID-19 pandemic. And of course, advisers are busy helping their clients, which may cause M&A strategy to take a back seat for a while.

What should potential sellers be thinking about?

First, it’s important to be realistic. A market decline brings with it a shift in the balance of negotiating power, from seller to buyer. In this environment, buyers will have more control and room to evaluate risk, and they can be more targeted in their search. As a result, sellers need to recognize that they will need to begin thinking about deal structures differently. There will likely be longer payouts and less upfront cash, for example, as buyers look for more protections against downside risk.

With the shift in negotiating power, firms also need to take the time to ask themselves, “Why does the buyer need my business?” Work to identify what is most attractive about your firm – whether that’s a certain client mix, the talent you have, your geographic location or a highly efficient operating platform that will be easy for the buyer to integrate into its platform – and showcase those attributes in tangible ways the buyers will appreciate.

On a similar note, if you’re considering a sale, try to find some time to work on an area of your business that can use improvement, such as your technology platform or preparing the next generation of leadership, to make it even more attractive to potential buyers. 

Second, potential sellers need to understand the motivations driving the deal to better showcase their value. Even in the best of times, M&A is emotional. So, especially now, firms should be asking themselves why they are coming to the deal and what they hope to gain – such as liquidity to exit the business, talent, or technology and platform opportunities.

But it’s important to understand what the buyer wants, too. Fidelity’s 2019 M&A Deal Valuation and Structure Study revealed that the failure to understand the synergies sought by buyers is one of the factors driving sellers to overvalue their business. Firms that are more aligned when approaching a deal and that have clarity on what they want the result to be will have more confidence and may just negotiate a better outcome.

Wherever firms are in the process of selling – even if they aren’t yet considering a deal – it’s important to understand the current landscape and its impact on the space, and to prepare for the future.

[More: Thinking about selling your firm? 5 ways to prepare ]

Scott Slater is vice president of practice management and consulting for Fidelity Institutional.