“But if you’re looking for liquidity for ownership but also want to join a larger firm, get support to grow your business and lock into potentially broader capabilities like distribution, and potentially a broader investment approach, you’ll likely lean toward an integrated buyer,” he continues. “But the flip side of the integrated buyer is you’ll be integrated over time and your brand will go away as you merge into the broader brand that’s acquiring you. That’s the trade-off. It depends on your objective as a seller and what your top priority is.”
Welling says RIA firms wanting to join Mercer Advisors are looking for a partner to help them grow, make them more efficient and productive, and handle back office chores so they can focus on client service. “The mechanism to get those outcomes is through integration so they can get the full benefit of our resources, scale and teams,” he notes, adding that it takes about a year to fully integrate an acquired firm.
“There are some things that happen faster,” he says. “You want cultural integration to happen right away. You want to move more slowly on investments integration—we’re not selling clients out of portfolios and causing tax consequences; we’re mapping portfolios in a carefully curated process to accomplish that.”
While none of the 36 acquired firms have filed for divorce from Mercer Advisors, the integration process hasn’t always been smooth. “Integration is difficult,” Barton says. “We’re an integrator, not an aggregator. So our model is all about change; it’s an exercise in change management. When I was still the CEO and doing M&A, I was wearing multiple hats and forced to move faster than I probably should have. I didn’t take the requisite amount of time to create that intellectual shared mindset with people. For example, I didn’t go into great detail into pointing out the various steps to integration, the time frame or the number of people who will be involved at each stage.
“Today, we’ve got a dedicated integration team where previously we had none,” he adds. “I’ve got a dedicated workbook. It’s called a road map, and it’s exactly that. From the day you sign the letter of intent all the way up through closing, it shows what happens during every step in between involving dates, who’s involved and how they’re involved, what’s your role in this process. I detail it out in writing, and have five pages of frequently asked questions on top of that. I take time to walk through the steps with the seller.”
Valuations
Mercer Advisors finds potential deals both externally and internally. In the former case, RIA firms either reach out directly or hire a banker such as FP Transitions or DeVoe & Company to find a seller for them, and they in turn contact Mercer Advisors. The company also has its own team of managing directors who do lead generation. “The majority of our business is the outside coming to us,” Barton says.
The three main things he looks for in a potential partner are a good cultural fit in investment philosophy, a belief in what Barton calls the power of financial planning, and an embrace of the fiduciary model.
"'Fiduciary’ means something to us, and it has since Rick Mercer founded the company,” Barton says. “He instilled those values from the very beginning. I ask for examples [from firms Mercer interviews] of how they put clients first. I want to know that they’re all about the client. I also want to know that they’re all about their staff, because how you treat other people tells me a lot about you.”
Assuming there’s a cultural fit, he moves onto financials. Barton employs three valuation methodologies to come up with a selling price: discounted cash flow analysis, a multiple of EBITDA and a multiple of top-line revenue. “The larger the AUM, the larger the revenue and the higher the multiples. I’m also looking for growth, and most firms aren’t growing,” Barton explains.
He says he does a deep dive into a firm’s client base by looking at its client retention numbers going back many years, how much money they’re managing for a particular client, client tenure, the geography of the client base, and the age demographic of clients to see if they’re in the accumulation or distribution phase. “I want to know where the clients are coming from and what a firm is doing to grow,” he says.
When it comes to the financials, “I literally sit down with the seller—now it’s done over a Zoom call—and go page by page over the P&Ls, the balance sheet and tax returns, and I really understand that business,” Barton explains. “And by knowing the revenue and the expenses, I know what the adjusted net income and EBITDA is. And we arrive at that number jointly with the seller so it’s no surprise because this is a live exercise, which they appreciate. Its ‘open kimono’ and I’m not hiding any cards.
“Together, we value the company,” he adds. “I say, ‘Based on all of this criteria, I think your company is worth 8.6 times adjusted EBITDA.’”