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For 10 consecutive years, there has been a steady uptick in M&A activity in our profession as financial advisory and wealth management firms continue to pursue opportunities to fuel growth or execute an exit strategy.
If you’re a firm owner, deciding to sell or merge with another firm is often fraught with conflicting emotions. You’ve spent years building a business, so it’s natural to question whether you can give up some measure of control. But many firm owners conclude that selling or merging is the best way to manage growth, scale their business, serve clients more effectively and attract and retain talent.
That’s how it was for me.
More than a decade after launching my advisory business, I was burnt out from working 70-hour weeks and knew I needed more support. Last year, I engaged with a consultant to identify potential options. At first, I resisted going the route of a merger or acquisition but wanted to keep all my options open. Throughout the process, I spoke with 13 firms and then engaged more deeply with three, not including Merit Financial Advisors (which came in through a separate channel).
While selling your business or merging with another firm is an extremely emotional decision, I tried to approach it rationally. I removed some of the emotion from my decision by weighing the pros and cons of each option and leaning on my trusted advisors.
This process taught me that you can achieve your business goals via a sale or merger so long as you clearly access and articulate what you don’t want – essentially, your deal breakers. To do this, ask yourself these four questions:
1. What level of autonomy can you tolerate?
Advisors sell their firms for a variety of reasons: to get access to additional resources, gain a complementary skillset, penetrate a new region, or as a succession plan. Before you begin to engage with suitors, be clear about why you’re selling and how much autonomy you’ll want after the sale.
Early on, I eliminated most of the would-be buyers because of how they wanted to handle my brokerage assets. These firms were willing to take brokerage assets but planned to bury them in separate accounts and assign them to a junior advisor. This is not how I operate. As a hybrid advisor, when I acquired brokerage assets, I converted those funds, when appropriate, and advised on the remainder without charging a fee. Many of these potential acquirers wanted me to continue charging an advisory fee, and I wasn’t comfortable with that.
2. How will your firm operate?
As a seller, you’ll want to understand how the potential acquirer will incorporate you and your firm into their overall structure. Will your firm remain intact, or will it be essentially stripped and subsumed into the larger organization?
Like many business owners, I have always been deeply committed to my employees who have played a big role in my firm’s success. So, when the first firm I went into talks with said they wanted to cut half my staff and shutter one of my offices, forcing some of my team to commute up to an hour a day, I knew that was a deal breaker. I did not want to be acquired by a firm that cared only about the bottom line with little regard for my clients or employees.
3. What is the financial and hierarchal structure?
Once discussions enter the financial/value phase, understand where you will rank in the financial and decision-making hierarchy of the acquiring organization. Is the acquiring firm backed by private-equity money with decision-making authority? Are there multiple share classes and, if so, what status will you have?
When it came time to discuss financials with the second potential acquirer, I realized it wasn’t a match. The firm – which was majority private-equity owned – had several classes of equity shares, and they offered me lower-tiered shares, with no voting rights.
I encountered a similar situation with the third firm, which was also backed by PE money, and came back with a valuation that was roughly 25% below what I expected, attributing huge costs for shared services such as compliance and human resources. And both firms resisted selling shares to my employees, which I believed was important to ensure that they have a stake in the future of the firm.
4. Is it a cultural fit?
Unless you’re a solo practitioner who is planning to retire right away, ensure that your values and culture align with the buyer. I knew I didn't want someone to come in and tell me and my team what to do. I wanted to have the autonomy to serve my clients and run my business the way I know how. But I also wanted a partner that would support me and help me achieve my goals.
Another critical thing to consider is if your team will flourish in the new environment. As a business owner, I’ve always believed that my team is both my greatest asset and a reflection of my values. When considering a sale, ask yourself: Will there be new career opportunities and paths for my team? Will there be mentors and people for them to learn from? Does the firm prioritize gender and racial/ethnic diversity? Do they bring together people with different strengths and skill sets? I knew I needed to find a firm that had career paths and processes in place. I also knew that an all-male team wasn’t the right environment for me.
While every firm owner should begin this process knowing their deal breakers, they should also remain open minded. I started on this path not wanting to change my firm’s name, but after getting to know the Merit team and understanding the benefits of joining the organization, I realized that the name was much more about ego and was not, in fact, a deal breaker.
Embarking on the M&A process is a journey. Identify how a potential sale or merger will affect both you and your team – whether you’ll be able to continue servicing clients in the same way and how your firm aligns with the new entity, operationally, financially, and culturally. But along the way, your priorities may change, and it’s okay to realize that what seemed like a deal breaker was more of a nice-to-have.
Tait Lane is a regional director at Merit Financial Advisors, a national wealth management firm that supports both the independent broker-dealer and RIA models. For more information about Merit, please visit www.meritfinancialadvisors.com.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Merit Financial Group, LLC, an SEC-registered investment adviser. Merit Financial Group, LLC and Merit Financial Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Guarantees are based on the claims paying ability of the issuing insurance company.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives
