DeVoe & Co.’s latest analysis showed overall M&A dealmaking in the advisory space “ran out of gas” in the third quarter of 2023 and is trending downward for the year, despite starting off strong.
“The music stopped,” DeVoe’s report stated. With Q3 showing another year-over-year decline compared with last year, the likelihood of 2023 being a down year in aggregate is “calcifying into a reality,” the firm wrote.
And that means that firms hoping to woo an ideal acquiror or merger partner will have to work that much harder and smarter, as deals get more complex and harder to find, Schwab Managing Director and COO Jon Beatty said in a new 79-page action guide, Activating Your M&A Strategy.
For firms wondering where to start, the guide recommends they take a step back to examine their strategic plan and consider the role M&A may play—regardless of whether they want to pursue a buyer, a merger or a sale or focus solely on organic growth, Schwab said.
“Inorganic growth is here to stay. Now is a good time for firms to consider whether spending some of their valuable time and energy on M&A supports the long-term strategy of their business,” Beatty said.
Jay Brown, partner and president of Boulay Financial Advisors, Eden Prairie, Minn, who over the past six years has acquired four RIAs to grow his Eden Prairie, Minn. Firm to $1.9 billion in assets, said in the guide that sophisticated education and planning are key to a successful deal. , especially as the M&A space has become increasingly complex.
“In that first deal, we weren’t a sophisticated buyer, and there was a lot less education out there for the seller. If we were to redo it now, I think it would be different for both of us” he said.
Brown also said he wishes he’d known that he could edit out less-than-desirable terms even late in the deal and “that once we get to one of our deal-breakers, it’s okay to just say no and move to the next thing.” Brown is one of four RIAs whose case studies are laid out in the guidebook, as a way of decoding the routes they took and illustrating what can go right and wrong in with deals.
It’s important to understand the deal-making process and balance the excitement around M&A with the fundamentals, Lisa Salvi, managing director of Business Consulting and Education at Schwab Advisor Services said in the guide.
One of the first goals in the process is to help RIAs thinking about M&A envision what a perfect “deal” and partner profile looks like and consider what can go right and wrong.
The guide also provides advisors with an orderly process for assessing their M&A readiness, along with insights into preparation and understanding valuations, financing and appropriate deal structure. There are also specifics on what will be needed for successful deal documentation and where a strong due diligence process can help advisors.
“Outperforming firms in the industry understand they must continue to weigh the strategic value of inorganic growth in the context of organic growth, which is critical,” Salvi said.
All types of M&A deals have their benefits and one doesn’t promote profitability over another, Schwab noted in the guide.
“While firms that acquire other RIAs have larger teams and more professional staff, their productivity metrics (AUM per professional, revenue per professional, and clients per professional) are comparable to firms that didn’t have inorganic activity,” according to data from Schwab’s RIA Benchmarking Study.
While firms with inorganic activity are growing their client base at a faster rate than firms without inorganic activity, results showed they spent slightly less time annually per client on operations and slightly more time annually per client for client service in 2022.
However, firms that have not yet optimized their M&A strategy and approach to integration often face a steep learning curve, Schwab said.
“I think the workbook would have been helpful as I went through my acquisition,” said Beth Steinhaus, principal advisor and chief compliance officer of Breakwater Investment Management, Seattle. Steinhaus acquired her firm in September 2021 using bank financing.
Steinhaus, who worked in client services with the former owner at Ameritrade and helped him launch Breakwater more than a decade ago before acquiring the firm herself two years ago, said she is always thinking about growth and her future plans for succession.
She recently hired two younger professionals she hopes to grow into possible successors of Breakwater, which she’s grown to $250 million in assets and 180 households, many employed by Amazon, Facebook, Google, Microsoft, Facebook and a variety of startups.
Steinhaus said hopes she can “train her new people up, invest in their education and take time to make them the best employees, while creating an internal succession plan.”
For the young wealth manager, internal succession is “the dream, because it keeps clients and advisors happy and you don’t have to worry about a cultural fit. That’s already established.”
Selling her firm to her staff “is obviously a long way off, but this is neither a simple process nor one that anyone should be rushing,” added Steinhaus, who said the guide is a useful primer for that.