Merger and acquisitions (M&A) in the investment advisor space has been hot.  Anyone active in the investment advisory market is aware valuations have been on the rise in recent years on the back of strong stock market performance, easy access to low-cost capital, and competition to acquire the best firms from both strategic and financial buyers.

This year’s volatile market pullback and rally (as of this writing the SPY is off a bit under 6% YTD in 2022) together with rising interest rates may signal some changes to the M&A marketplace, but for owners of quality firms seeking to sell a portion, or all of their firm, there will continue to be attractive alternatives available.  In this article we’ll look at some of the issues owners should consider before deciding to enter the M&A arena on the sell side.

Do you want an investor, or a buyer?

In recent years there has been a rise in financial buyers willing to consider making a minority investment, usually at least 30% to less than 50%, in high-quality investment advisors.  Although selling a minority interest in your firm won’t get you the maximum multiple, it may be a good option if you’re seeking capital for expansion without giving up ownership control.  However, even though you’re not giving up control, you will need to be prepared for new requirements an outside investor may have for reporting and disclosure.

Selling the entire firm will likely maximize your value, but ultimately you give up the ability to control the future direction of the firm and your role in it.  Be sure to spend some time considering the impact of both options before deciding which direction you want to head

To Integrate or not to integrate?

Most financial buyers active in investment advisory M&A have chosen not to integrate their portfolio firms, thereby avoiding the cost and disruption of merger integration for both producers and clients.  Strategic buyers too have often chosen not to integrate the firms they have acquired into either a single brand or operating platform for the same reason.  Larger strategic buyers may seek to integrate acquisitions into the larger firm, and therefore may be willing to pay up based on the expectation of achieving expense leverage through integration. It’s important to realize, even if a buyer promises “no changes” to your business, expect that if a buyer has control, they’ll make future changes if they determine they’re needed.

What do you want your role to be post-sale?

Knowing what you want to do after you sell is an important consideration.  If you want to sell all (or a majority) of your firm, you’ll need an employment contract that specifies your role, and your compensation after completing the transaction.  Recognize the buyer can always buy you out or not renew your contract at the end of the initial contract period.  You may also be concerned about what the roles may be for your key people after the sale.  If you have non-compete agreements with key producers, relationship, or portfolio managers, that will help you maximize the value of your firm and assure them they will have some role after the firm is acquired.  Just remember, there are few, if any, long-term commitments after you sell.

Consider all the options

Many sellers consider strategic buyers such as larger RIAs, banks, or financial buyers such as private equity firms as the logical buyers for their firms.  Some owners would consider selling to more junior members of the firm, but often the logical buyers within the firm do not have access to the necessary capital.

If selling your firm to your employees is something you’d consider, selling through an Employee Stock Ownership Plan (ESOP) may provide the answer to a range of objectives. Selling to an ESOP may provide significant tax advantages to the seller, you can sell some or all the firm, avoid integration disruption, and post-sale roles for the owners and key employees can be determined prior to a sale.

Financial services is one of the largest segments among ESOP-owned firms.  It’s not the answer for every seller, but it’s definitely an option you should consider.

Obviously, there is no one answer that is right for every seller.  It’s important that you to think through all the issues and consider all your options.  At ButcherJoseph & Co., we work with investment advisory firms through the entire process to help position your firm for a sale, analyze all your options so you can make the best decision for you to maximize value, and execute a sale process with a focus on personal attention.

If you are an owner who is thinking about selling your investment advisory business, we often begin the process with a complimentary feasibility study analysis, which can help you understand the value of your business and which type of buyer may be best for you. If you are interested in learning more, don’t hesitate to contact us today.