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RIA M&A: What are the best deals going on?

Rhea M&A is teaching us a lesson. In a painfully competitive market for buyers and an increasingly saturated market for sellers, it takes longer to separate from the pack. Access to capital and interest in growth isn’t enough to be a successful acquirer, and sellers can’t just sign up for a sale and expect great results.

The 2022 RIA Deal Room Report, sponsored by BlackRock and to be released in the spring, will dive beneath the eye-catching M&A headlines of 2021 to evaluate what led to the deal. Transaction numbers hit an annual record in 2021, and early research from RIA Deal Room pointed to another double-digit percentage increase in average valuations.

It’s easy to conclude that buyers are paying higher premiums than ever before, and owners are putting their firms up for sale to take advantage of higher pricing. But numbers tell you more when you ask the right questions.

Why are firms known to have more success with transactions than smaller, opportunistic players? Why do some sellers command higher premiums than their counterparts? Surprisingly, the answer is the same for both buyers and sellers—the firms with the best stories win.

Both acquaintances and sellers must create a compelling picture to stand out from the competition. The same equation that the takeover wins creates an opportunity to sell at a premium valuation. Successful RIA stories reveal expertise in three areas: organic growth, employee engagement, and the strength of the platform and service.

organic growth engine

Strong market share performance and inorganic growth activities can mask an important basis of value — the net new organic growth metric. Achieving sustainable organic growth is not an option; A firm that relies on market performance to hide net outflows from client attrition or withdrawal of funds is not a sustainable business.

Buyer: The market rewards buyers who have a sustainable growth engine that can be implemented across geographies by entering lucrative growth channels. Interested acquirers must demonstrate an ability to help others grow at an increased rate compared to their current state.

Seller: The market consistently favors those with organic growth. This growth is measured net (versus absolute) of the market and reflects new customer acquisition and favorable customer demographics. Higher growth inspires higher valuation. Additionally, a seller’s perceived optionality (due to less risk and greater upside) and additive qualities induce buyers to bid more competitively.

employee engagement

Now that remote working is a viable option for many wealth management firms, Talent is more mobile and more readily geared to platforms with compelling growth stories and career trajectories. RIAs are responsible for developing the next generation of talent and creating lucrative homes for talent by offering the best RIAs a clearly defined career path and growth opportunities.

Buyer: The most successful buyers easily communicate how talent is increasingly better than the best option on their platform. This can sway potential vendors as they consider the ideal long-term solution for their talented teams. Substance is a well-crafted approach to career development, compensation and impact.

Seller: The market rewards sellers with a compelling bench. Acquisition brands publicly express their desire to create depth through talent acquisition. Potential vendors or partners who expand the depth and geographic or demographic reach of a partner firm will receive a premium over counterparts who cannot.

Platform and service power

The competitive bar for all money management firms is rising. It is becoming increasingly difficult to differentiate from the pack as customers want more value for their fee. Most major platforms have implemented a wide range of services which make it a “one-stop-shop” for the ultimate investors. Increasing the breadth of the platform allows those same platforms to instantly add value to potential sellers and talented professionals.

Buyer: Sellers often favor buyers who can offer their customers an expanded service or streamline back-office operations. This dynamic has become more rapid in recent years and helps contribute to the rise of acquisition brands. To compete effectively, potential buyers must demonstrate their value-added philosophy that will engage both the next generation of customers and employees.

Seller: Buyers respond favorably to a well-established platform because it instils confidence in the ability of the firm to grow without sacrificing customer service. Additionally, vendors with a thoughtful approach to specific customers, value-added services or a segmented approach have a unique story to grow/add to a platform. An established platform that drives niche service separates the seller from the pack in terms of evaluation and fit.

story matters

When you come to the headlines, rising levels of M&A do not guarantee equal results to all participants. The market places high value on growing firms with loyal talent and scalable, niche offerings. Acquisitors want to buy these firms and sellers want to join them because they provide more optionality for customers, employees and principals. Additionally, these three areas of focus have tremendous application for RIAs wishing to remain independent and increase their firm’s reputation and value. The RIA industry must remain diligent and learn from M&A as a leading indicator of the changing competitive balance.

Brandon Kaval is a principal with Advisor Growth Strategies, an RIA management and transaction advisory firm.

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