Every firm founder who’s dreamed of being acquired by a larger firm—and either walking away with a pot of gold or being instantly endowed with greater capacity for client service—need only devote themselves to following a simple checklist of pre-sale preparations, according to experts in the field.

And block out three to five years, if not longer.

“This is a long, multiyear process of positioning yourself and ensuring that the great qualities about your business are coming to the surface,” said Mike LaMena, CEO of Wealthspire Advisors and a panelist on “Mergers and Acquisitions: What to Do Before Signing On The Dotted Line” at Schwab IMPACT 2023 last week in Philadelphia. “Are you growing organically? You're not going to get a growth premium in your valuation if you're not growing organically. If you haven't figured out a succession plan, you don't have depth or resiliency.”

LaMena was joined by Harris Baltch, managing director and head of investment banking at Dynasty Financial Partners; Nick Engelbart, chief financial officer of Carson Group; John Furey, managing partner at Advisor Growth Strategies; and David Mrazik, managing partner at Merchant Investment Management.

In the current M&A environment, deals are continuing to get done despite interest rates and other headwinds, geopolitical risk and the volatility of the markets, the panelists said, but buyers are taking their time and being thoughtful in their acquisitions.

“If you take a deeper dive into the industry, the same fundamentals that have led to a heightened volume of M&A still exist. The RIA industry is very fractured, and continues to be ripe for consolidation. And there's a bull market for fiduciary advice,” LaMena said. “I think the support for the independent fiduciary RIA model being the best model for clients to receive service is absolutely in full force.”

But what’s helpful to dealmakers is that there are a number of founders who built great businesses who haven’t figured out a succession plan and the only-increasing cost of delivering a premium experience to clients, he continued.

“We're in an arms race. For a decade we've heard about price compression, fee compression. It hasn't been realized. What's happened is the bar for what merits premium service has continued to be raised,” he said. “You’ve got to be able to invest in technology, people, process and resources to deliver more to your clients. All those macro factors are in place, and are going to continue to drive M&A activities. While there are headwinds, I don't see any slowdown when we look at our pipeline. We're not seeing any fewer quality firms come to market.”

In fact, there have never been more buyer options for firms considering joining the ranks of the acquired than there are today, the panelists said, and a seller needs to sift through which of those options are viable and anticipate how each one will impact the firm and its clients after the sale.

“If you're a potential seller out there looking, it's your job to be ruthlessly honest with yourself about what you want out of a transaction,” Mrazik said.

Does the seller want to head into the sunset with top dollar and not a care in the world? That's going to dictate a certain type of capital and a certain type of operating partner, he said.

“If you're somebody who thinks of yourself as, “Hey, I'm young, I’m hard-charging, I've got great generation-two people in my business. I really want to build a legacy. I really want to build a lasting brand.’ Well then you probably don't want to sell your whole business to somebody who's going to pay you top dollar for it because you see how you can go $1 billion to $3 billion to $10 billion over the course of the next three, five, 10 years,” he said. “You're looking for somebody who's more of a strategic partner, more of an aligned equity investor.”

Regardless of the kind of buyer a seller is looking for, there is a shortlist of concrete tasks that should be completed before showing up in the marketplace, the panelists agreed.

First, a seller should have a vision for what the firm will look like in three to five years, whether the seller remains on the scene or not.

“The qualitative element of a deal starts with going back to why are you doing a transaction and, more importantly, what are you looking to accomplish post-transaction,” Baltch said. “When I marry the narratives of why you're doing a deal and what you hope to achieve in the future, that's when sparks start to fly. We know what we're looking for, that cultural alignment, that business alignment, the things that become exponential. That combination is ultimately going to create value for clients, create expanded opportunities for the employees that are involved. And we know that that will be good business.”

Having a clean compliance record is a must, added Furey, as every potential buyer is going to do a thorough background check. And so is highlighting what’s unique and important about the firm.

For example, if a firm has a unique investment philosophy it’s married to, eliminating the buyers who would want the firm to use centralized investment management is just as important as identifying the acquirors who would leave well enough alone.

“And your books and records have to be intelligent, easy to read. Whether we're using a bank or financial advisor in the transaction or not, we need to be able to get to the bottom of these numbers very, very quickly,” LaMena added. “But I keep going back to the quality of people. I make it a point to whenever we're partnering with a firm, we always spend a lot of time on site, face to face.”

That time includes visits to the firm’s offices and inviting the firm’s advisors to Wealthspire’s offices in New York, complete with a nice dinner somewhere.

“The part about going to dinner, it's not because we get to expense a nice meal. It's because I want to see how an advisor of their team interacts with waitstaff,” he said. “I want to see if somebody is rude to the waiter or waitress. These are people we’re going to be around, and we’re going to see our reflection in them and vice versa. So if they’re rude to waitstaff, they’re not people we want in our organization.”

It’s a cliché, the panelists said, but an acquisition is a kind of marriage. And with small firms, it’s even more important, Baltch said.

“If there's any character issues or if you can't see yourself trusting and having the basic principles of respect and making sure you can deliver for one another, then I would move on to the next opportunity,” he said. “There's enough out there. I would not compromise if there's a question on character.”

With all that in place, a firm should maximize enterprise value by getting a valution based on the kind of deal they’re hoping for, as valutions for a full acquisition are different from valuations for a minority deal. And the valuation should be recast annually. Also, if there already isn’t one in place, the firm should draft an operating agreement.

“There are a lot of wierd scenarios that can happen in the lifecycle of running your own business. Something could happen with the principals. You can get hurt or get sick, or if you're planning for succession, there could be a retiring advisor,” Baltch said. “If you don't have very strict documentation that describes what happens in a what-if scenario, you're going to have to act in real time, pull up a lawyer, and work out a deal internally or externally in order to accommodate that value. Which is extremely tricky.”

And finally, founders should right-size office and travel and entertainment expenses to accommodate cash flow, and even more importanlty, re-examine what they’re paying themselves.

“If you're thinking about doing an M&A deal, new partner that's coming in is probably going to care about how much you're paying yourself,” Baltch concluded. “And so you need to think about what the right level of compensation is so that even after you do a deal, to the extent you want to continue working, you're still paying yourself a fair wage so that you can continue working in the business as an operator, but not necessarily as an owner.”