Inorganic growth is viewed as the quickest way to increase your revenue. You can grow your firm by buying another and perhaps less obviously, selling yours. In this blog, we consider the pros and cons of being a buyer.
Pro #1: A fractionalized industry with aging advisors and advancing technology
Advisory firms are fractionalized with many small firms owned by aging advisors scattered across the US. Aging advisors know a succession plan is a must. Many small firms have enviable profit margins, although margin pressure is growing caused by rising technology and compliance costs. Additional margin pressure results from the downward pressure on fees as the commoditization of portfolio management takes hold. The technology complexity and the rate of technological change are also challenging advisors.
Pro #2: An in-vogue investment with multiple sources of available M&A financing
Enhanced by a looming shortage of advisors, the independent advisory channel is a siren’s song to larger RIAs, consolidators and private equity firms who recently increased their interest and buying activity. Capital is easily accessible now as private equity and venture capital join the banks who specialized in financing advisor acquisition.
Pro #3: A growing pace of firm sales
The pace of selling has increased for deals both large and small therefore advisors are regularly reading about sales and likely have a peer they know who has sold which makes the concept of selling more common, acceptable and approachable.
Con #1: The ratio of buyers to sellers is 50 to 1
As self-selected alpha dogs, practically every advisor is a buyer regardless of AUM, age or a compelling value proposition. Advisors have been controlling their own firms and destinies for decades. While they intellectually know they need to hand over the reins, it is an emotional struggle as they are contemplating not just selling their firm but ending much of their identity. The enormity of this should not be underestimated by a potential buyer.
Related: How the Buyer and Seller Relationship Has Evolved
Con #2: Many buyers lack a clear compelling value proposition
It takes more than saying you are a buyer to attract a seller. It takes more than just money too. A value proposition needs to include leadership, internal firm infrastructure, a succession plan, the latest technology, investment management, a clear benefit for the advisor’s clients and a post purchase integration plan. Lead off your discussions identifying how the advisor’s clients would benefit from the sale. Are the client's cost lower, are the service better and broader?
Con #3: You are competing against sophisticated well-funded buyers
Meeting a match at a custodial conference and continuing the conversation may still lead to a purchase but the competition is tougher now. You are competing with well-funded firms’ adept at M&A outreach, deal structure and integration. Previously not the focus, smaller firms are now targets as national RIAs with regional reach empower their regional offices to attract local tuck ins.
Final Thoughts
If you want to be a buyer, prepare your firm, confirm your value proposition and create an acquisition plan. It is difficult to run your firm and search for acquisitions simultaneously. Those firms who are successful consider acquisitions a business line. Allocate the needed human capital, yours or someone else’s, for the acquisition search.
The next blog will consider accelerating your growth through selling.