Editor’s Note: Chris Frieden is arguably the leading M&A attorney in the wealth management industry. A partner at Atlanta-based Alston & Bird, he has to date advised buyers and sellers on 25 different transactions involving more than $35 billion of total assets. Although a very aggressive advocate for his clients, he has a reputation for being “the calmest guy in the room,” who somehow gets deals to completion. In this interview, he shares his view of the future of the industry.

Hurley: Where is the industry today versus a decade ago?

Frieden: Ten years ago, it was a bunch of entrepreneurs trying to build a business that they could exist on. It is starting to evolve into groups of big-boy companies with financial statements and professional management and that are growing. You will end up with some really significant, key players; a bunch of people who are tweeners trying to figure out what they’re going to do; and then a bunch of people who just didn’t make it. I think it’s going to look a lot like the evolution of the banking industry did.

Hurley: How would you define big?

Frieden: A few years ago, if you were a billion-dollar advisor, you were big. Today, if you have a billion dollars, you’re relevant but not big anymore. Ten billion today is big.

Hurley: In terms of revenue?

Frieden: Twenty-five million dollars plus. Ten years from now there will be five or six national players that will be the Wells Fargos of the advisory space. They will have $200 million to $1 billion of revenue, a national brand and serve all different tiers of clients.

They will serve the masses using low-touch technology and also have private bank clients. Although they will operate under one brand, they will deliver services [to different groups of clients] under sub-brands. They are going to try to make [high-net-worth and ultra-high-net-worth clients] feel like they’re getting something different.

There are also going to be 25 or 30 super-regional firms in really good markets, such as New York, Boston, Chicago, Los Angeles, Atlanta, San Francisco and Dallas, that will differentiate themselves by specializing. They may not have a dominant presence but will be well known [in their geographic market], have $25 million to $50 million of revenue and be big-boy businesses that will sell for a premium.

Hurley: What about the 18,000 or so small firms?

Frieden: They have no real economic value to a buyer and certainly won’t command a premium. They’ll have a hard time growing and will feel increasing competitive pressures. The owners will be able to continue to clip coupons, but I don’t think they will have a big payday or sale at the end of the day.

Hurley: Is there any way to get to $200 million or even $50 million of revenue without acquisitions?

Frieden: Absolutely not. When we look back 10 years from now, size will have mattered more than people may have thought. While you cannot do dumb acquisitions, the winners will have done five to 10 good, transformational acquisitions of firms with successors that are in good markets [and] have good clients, internal controls and financial reporting.

If I had a firm that had $2.5 billion of assets and $20 million of revenues, the way to get to $40 million is by merging with or acquiring another similarly sized firm. The winners will take two firms that were solid on their own and make one plus one equal three.

Hurley: Is there a first-mover advantage?

Frieden: It is huge. Although there are 1,000 or so firms that are relevant, there are far fewer worth buying. Those with real value are going to get picked up quickly. Those firms that complete deals early on are going to be way ahead of the game. They will have proven themselves as acquirers and other deals are going to find their way to them when everybody else is out scrounging.

More importantly, this is a human capital business. When you have done three big acquisitions and have a team of good people in markets that talent wants to be in, talented advisors are going to seek you out and clients will find you. It becomes a sort of self-fulfilling prophecy.

Hurley: What is the profile of a potential successful acquirer?

Frieden: The first deal is always the hardest to get done because you are learning to shave on somebody else’s face. You do not have the processes in place, do not know your partners’ risk tolerances and haven’t thought [about] integration. You also often have a “my way or the highway” mentality, something that will not work.

A successful acquirer understands the advisory business but also has management skills. It also requires the ability to negotiate, close and integrate a deal. There is a time to be accommodating when you’re negotiating and there is a time to take a hard line, and successful acquirers must have the capacity to do both and to know when.

Successful acquirers also do not look for the perfect deal—the unicorn. Risk is part of M&A and why [acquisitions] have potentially meaningful upside. Protections can be structured into the deal, but there is always going to be some amount of the unknown. And if you’re focused on eliminating every bit of it, you will over-negotiate the deal and be unable to get it done.

Lastly, successful acquirers are also going to be process driven. They are going to know up front where their capital is coming from and know how to do diligence. They are going to negotiate an LOI and then move on to an acquisition agreement and then through the consent process. They are going to get the deal closed and integrate it. All of this is going to be very process driven, and they’re going to get it done and move on.

Hurley: And ownership structure?

Frieden: Potential successful acquirers have broad ownership. While they may have some controlling owners, they rely on their successors to take their firms to the next level and their upside is in equity ownership.

Hurley: What about agreements?

Frieden: Successful buyers and sellers have well-thought-out contracts, including restrictive covenants and operating agreements that are comprehensive enough to deal with what happens when shareholders come and go. If a company lacks such a regime, it is still immature and its owners possess a business that somebody could just walk away with. They are not very far down the curve in terms of having a sustainable enterprise.

Hurley: What’s the difference between working with a potential acquirer after it has completed a deal, versus working with one on its first acquisition?

Frieden: They’re jaded and bitter. [laughing]. Seriously, any first acquisition is a very emotional process. The buyer feels like it is betting its kids’ college education, even the food off its table. Every ask made by the seller hurts. But once a deal is completed—and ideally it goes well—the buyer feels better and recognizes that a lot of its anxiety during the transaction was driven by the seller’s personality and not by deal economics.

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