What Makes RIA Firms Attractive Takeover Targets?

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Advisor considering selling RIA firm


As of late, many Registered Investment Advisory Firms (RIAs) have experienced a dramatic increase in Assets Under Management.  While this run-up can be attributed to several factors, the primary driver of AUM growth has come on the back of mergers and acquisitions (M&As).

Between 2014 and 2019, the number of RIAs with $1 billion or more in client assets grew 54%. Megafirms holding $5 billion in assets have witnessed even more impressive growth, increasing from 28% in 2014, to 52% in 2019. The number of firms with $5 billion in assets under management is only expected to grow in the future.

If you’ve decided to position your RIA firm to be acquired, there is a multitude of opportunities, but so is the number of competing firms. Add to that the protracted nature of M&As – which take anywhere between four and six months from inception to closing – and you’re looking at substantial due diligence to consummate a deal.

Planned and poised for future growth

A niche market or clientele works in your favour. Are you a promising firm in your niche or do you offer a differentiated experience that earns client loyalty? The buying company is more likely to pay attention to strengths such as unique offerings or the opportunity to capture untapped, or high-potential market segments through your firm.

If you haven’t carved out a niche, or if you don’t offer a broad range of services, your strategic vision and efforts at continuing growth will come under consideration. Have you taken steps to build a future pipeline? What kind of trust and goodwill does your firm enjoy for it to be chosen over competing RIAs? Buyers will evaluate your company’s long-term prospects in making their decision.

Financials that generate confidence

Clean and organized financial statements create the right perceptions about your company’s ethics and transparency. Signs of creative accounting or books that haven’t been updated may raise red flags and spark uncertainties about how you might integrate into the acquiring company.

Even if your financial results aren’t stellar and your company has considerable debts and expenses, the buyer will weigh liabilities and risks against the advantages of acquiring your company. Clean financials allow the buyer to perform due diligence easily, which in turn, allows them to proceed with the takeover confidently.

Moreover, the buyer will want to pay a reasonable price for your business. They will look at your debt load and liabilities in determining a good price to pay. If you have met your accounting obligations (and other things considered), you may get a better price for your business than expected.

Buyers will vet your financial statements rigorously to avoid nasty surprises after acquisition is complete. Should the acquiring company fail to do proper due diligence and discover that your business hasn’t followed a proper financial reporting process, they might void the acquisition and you may face embarrassment and a loss of reputation.

What do acquiring companies check for?

Your company’s financial health, key results of operations, cash flow for indicated periods, and other financial metrics, prepared using Generally Accepted Accounting Principles (GAAP), will come under scrutiny. Other than historical financial statements, the buyer may also be interested in future financial projections statements.

Some of the common inquiries that may be made as part of seller due diligence include:

  • Have you presented audited financial statements?
  • Is your company’s profit margin increasing or decreasing?
  • Do your financial statements reflect all current and contingent liabilities?
  • Are future financial projections and assumptions reasonable?
  • What capital expenditures and investments are required to sustain business growth?
  • Are EBIDTA and adjustments to EBIDTA correctly calculated?

Buyers will determine your company’s financial health from your quarterly, annual, monthly financial statements. As extensive vetting of the seller’s financial statements occurs, it is in your best interest to maintain updated books and prepare accurate financial statements.

Important financial statements such as the income statement, balance sheet, and statement of cash flows, are all needed during compliance checks. An SEC inspection is one such event. During the pre-audit period, examiners may ask you to provide several documents, including financial statements.

Do you have the critical capabilities buyers seek in the deal?

Other than strong financials and differentiated experience or longevity, certain capabilities may make your firm valuable to buyers. Your talent bench will be a big draw, as will your technology prowess. If you demonstrate strong new technology competencies or benefit from top talent, the odds are likely to be in your favour.

Buyers will perform due diligence on how the partnership will work in the long run. Ultimately, it is not just one or two, but rather, several factors that determine your attractiveness to potential suitors.

Take your time

With RIA consolidation and takeovers reaching record levels, there is, without a doubt, no better time to consider M&A prospects. That being said, you should, avoid rushing into a deal without first assessing compatibilities in culture between your firm and the buying company. The partnership will be able to form synergies and deliver the expected value only if you and the buyer share similar values and client approaches. A well-considered decision is crucial to successful integration and sets the foundation to soar to new heights.

Compass CFO Solutions LLC is the leading provider of outsourced CFO, accounting, and bookkeeping services to the wealth management industry. Compass CFO Solutions’ services allows RIA firms to spend more time growing their business. Learn more at www.compasscfosolutions.com.

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