A Sale Can Enhance a High-Performing Growth Culture

Deal structure

Growth matters. It’s a major consideration in deal pricing and structure. That will remain true even – and perhaps especially – if the deal climate cools or markets turn down. Steven Levitt, an RIA-focused investment banker with whom I’ve worked closely, said recently, “I think that for the best-in-class wealth managers, there’s going to be very, very strong continued M&A interest, whether we’re in a bull market or a bear market.”

That rings true to me. Growth is among the most significant proof points for quality. I want conversations with potential sellers to revolve around how to take it to the next level. Deal structures are never cash only. There’s always a growth component, usually in the form of an earn-out over the first year and a further incentive to continue turbocharged growth in the following years.

Sales culture

Say a firm has solid operations and some market growth thanks to one producer who’s bringing in AUM. The firm isn’t stagnant. There’s some growth. But is there a growth culture? Is the firm built to think in terms of developing center-of-influence relationships and expanding wallet share? Are there new-business goals, defined business-development responsibilities and programs that reward new business?

If you don’t have that culture, don’t assume it’ll change. Ownership may change, but if the core team remains the same, so will the local culture.

If you don’t have a sales culture, don’t wait. Build it now. It’ll help you post-sale and, very likely, boost the sale with a stronger purchase price.

Lead-generation programs

Lead-gen programs have the potential to serve as rocket fuel, but it’s a mistake for RIAs considering a sale to plan on relying on them. Be skeptical if a potential acquirer stresses a lead-gen program as the main post-sale success determinant.

Don’t assume a new firm’s lead-gen program will be your main source of growth. If there’s a new corporate channel for leads, great. But what if it dries up? Both Schwab and Fidelity, among others, have exclusive programs. But these can change over time. There’s no guarantee you’ll continue to get leads from a custodian. If you join a larger firm and have access to a program, consider that gravy – not foundational. I focus on offering solutions in areas other than investment advisory for our RIA firms, in property and casualty, employee benefits and retirement plan services. Just like diversifying a client’s portfolio, you never want to put all your eggs in one basket.

Recruiting referrals

Throughout the profession, RIAs hope acquiring firms will provide them with recruits. There simply aren’t enough people to fill all those pipelines. As with lead-gen programs, consider hiring referrals as gravy. But you can’t rely on someone to do this for you. No one will know the culture of the local firm like you do. Be in the universities. Network with other professionals in your area. Draw in career switchers. A math teacher you know may be a better candidate than a referral through a more distant channel.

Operations and compliance

Don’t make the mistake of thinking a sale will fix existing operations or compliance problems. They’re likely to get in the way of a sale occurring at all. Yes, there’s a buyer for every seller. But if you’re a growth-oriented RIA, you don’t want the equivalent of selling a house to an as-is cash buyer looking for a discount. And don’t try to hide compliance issues. Like basement foundation problems, they always come out in due diligence.

For growth-oriented RIAs, operations and compliance post-sale can absolutely be part of rocket fueling growth – by freeing up time and energy to focus on relationships. Support from credentialed experts, better technology, back-office support and much more – all these can give you substantially more capacity to create business opportunities.

And opportunity is what it’s all about. If you’re an RIA hungry to elevate your firm, a sale can bring the rocket fuel to get there. Just make sure you don’t fall into the trap of expecting change where ultimately only you can make it happen.

Tina Hohman is executive vice president and national practice leader at Alera Group Wealth Services.

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