How do you turn the topic of M&A deals into a Socratic dialogue?
Two industry veterans in this area gave it a try during a webcast Monday sponsored by Echelon Partners. Dan Sievert, the firm’s CEO and founder, took a point and counterpoint argument with investment advisor attorney Thomas Giachetti of Stark & Stark as the two attacked a series of mergers and acquisitions questions and tried to get to the bottom of both buyers’ and sellers’ points of view.
Echelon reminded listeners that the third quarter of 2020 saw record activity for RIA mergers.
“There were a record-breaking 55 transactions that took place during the third quarter of 2020, serving as the most active quarter in the history of the wealth management industry,” Echelon said in its “RIA M&A Deal Report” for the third quarter.
The last few years have seen a seller's market in the registered investment advisory business as firm valuations rise with the market and longtime advisors in a graying industry seek exit strategies and succession plans.
Among the questions asked Monday during Echelon’s most recent installment of its “Deals And Dealmakers” webcast: Are letters of intent binding? How long should confidentiality agreements be observed? Should non-solicit agreements apply only to the officers of a company?
Giachetti and Seivert each took pro and con positions on these issues, acting out the roles of the players and raising what their objections and prejudices are likely to be.
When Do Confidentiality Agreements Self-Destruct?
In other words, how long should the period of silence be? Should it be limited to two years or something longer? After all, sellers are often the ones being approached, and they have sensitive information about their clients, revenue, proprietary trading systems, etc., that they don’t want to hand over to another entity when there’s no sure thing the two entities are going to merge.
Giachetti, chair of Stark & Stark’s Investment Management & Securities Practice Group, took the seller’s point of view, claiming two years of silence is not enough, and that the confidentiality agreements should extend as long as possible—five years or even longer in a perfect world. “Why? You are providing a potential acquirer with information on how you run your business. All your secrets. No acquirer is going to want to purchase you unless they really see how you operate on a day to day basis. They want to see your data, they want to see your know-how,” he said. Most deals don’t happen, he added, and most sellers are going to worry about the data they shared with a fickle buyer. “All I’m asking you to do is not steal from me,” Giachetti says. If the buyer can’t agree to that, “Why is it I even want to talk to you? You approached me. … Don’t tell me you’re entitled to my information and I get two years and you can use it.”
He also recommended that sellers should try to litigate it in their home state if something goes wrong since traveling across country for satisfaction is going to be difficult.
But in reality, two years is usually on the long end of a confidentiality agreement, Seivert said. Most buyers are looking at 30 to 50 deals a year, and they are going to be turned off by those who insist on putting heavy handcuffs on them for too long.
But he also noted that it depends on what’s being protected—for example, is it the firm’s tech or its sales information being kept under wraps? Proprietary tech is not going to go out of style in two years.
A firm’s marketing approaches, meanwhile, might be less sensitive, maybe just limited to referrals and centers of influence strategies. But some firms are going beyond that, Seivert said, and need their strategies protected from breach by would-be buyers. “We’re seeing more and more firms, particularly the ones that are focused on the sub-$1 million and particularly the sub-$500,000 in AUM clients, that are using either artificial intelligence or algorithms for their marketing. That can be extremely powerful, and if others get a hold of how that’s being done, then that could be particularly damaging.”