An M&A deal is like a marriage, you have to believe in it

When it comes to the current M&A landscape, Jessica Polito compares it to a marriage, remarking there's been a shift in mindset over the last few years of looking at M&A as “an additive partnership,” rather than a financial transaction.

“When you start dating people, you choose one to go out with, but you still have to meet their friends and their parents. By the time you get engaged and you're standing on the altar, you can't imagine life without them, but it's iterative. It takes a lot of difficult conversations to get to a point where you believe in the partnership,” the founder and principal at Turkey Hill Management, says.

Mergers and acquisition are the same thing and advisors have to be cautious, she says, because “there are a lot of really good firms out there that might not be the right fit. It doesn't make them bad firms. It just means you have to do your homework.”

Polito notes that the M&A landscape is “an interesting time” because while it’s been really busy, there’s also the attribution of private equity that's occurred over the last few years.

“It's capitalized firms that historically couldn't participate in processes,” she noted. “What that's done is it's allowed sellers the opportunity to be selective in who they decide to partner with, and it's allowed buyers to grow in a way that otherwise wasn't available to them before.”

Polito’s view meets industry expectations as a recent report from Advisor Growth Strategies expected increased use of equity consideration among buyers and sellers. However, despite M&A being the industry’s current FOMO phenomenon, Polito believes that it can be "distracting," highlighting that smaller RIAs might be better off investing their time and resources into organic growth.

“A lot of firms and individuals feel like they need to engage in M&A because it's part of the Zeitgeist right now [but], you shouldn't,” she asserts. “You shouldn't get yourself into debt. You shouldn't bite off more than you can chew. You should really spend some time asking yourself, ‘Why do I want to be a buyer and how is this going to benefit my firm and the firm that I acquire?’”

Additionally, there’s two risks that come from M&A activity from both sides of the equation, says Nate Lenz, co-founder and CEO of Concurrent. For the seller, the risk lies in losing "quality control" over the delivery of their service model.

“Once an advisor sells, a lot of these larger scale aggregators are essentially saluting the flag and are wholesale adopting their asset management strategies,” he says.

“Because of these different components that allow the acquiring firm to tap into other revenue lines, it makes sense from the buyer's perspective as to why they’d need to do that to get the return on the investment that they've made.”

The best acquirers, he added, should be able to bring “a tremendous amount of value” in those additional resources.

“The risk from the buyer’s perspective, is if you have a seller that's ultimately not bought in to what's being delivered, and they're not able to get adoption quick enough in order to realize the return on the investment that they've made, I think that's a risk.”

For those who are willing – and ready – to take their firm to the next level through M&A, a priority should be considering the transition risk that’s associated with making the move, says Lenz.

“My one piece of advice to advisors that are considering moving from either a wirehouse or an IBD that are seeking out an acquisition opportunity is look at the strategic fit,” he says. “Look at the cultural fit. Those are the things that are going to carry the day.

“If both of those are there, then the combination can be accretive to both sides and can be attractive. If you're just chasing the dollars, it might not necessarily be worth the risk to do so and lose your identity in the process.”