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.
Hurley: What’s going through the seller’s head during the process?
Frieden: Every seller has a reason. Some are selling because they have taken a business as far as they can—grown it as much as they are capable of growing it. They are selling at what they believe is peak value for that business. They could continue to run the business but have chosen to sell instead to maximize value.
Some are sellers because they don’t have a succession plan or they are 70 years old and are out of gas and just want to retire. That subset of people is selling because they want liquidity and to go off into the sunset and be done.
Another subset includes people who are selling because they know they’ve got a broken widget and they want to sell it before it really falls apart. Some of these firms may have a disproportionately old client base, personnel [or] advisor or [have] compliance problems that will take time to fix and have decided to sell rather than fixing the problems.
Even more do not know they have the broken widget or are in denial about it. They’ve been clipping coupons and feel good, but they are not looking at it from the standpoint of somebody who’s buying those cash flows and expects to collect them for the next 20 years. Buyer due diligence often turns up these problems, which may then lead to a reduction in purchase price or the parties walking away. A seller who loses a deal over diligence problems may find it much harder to do a deal down the road as well.
Hurley: What are the biggest mistakes by sellers?
Frieden: Owners who think that they are ready to sell, but they are not. They are not over the Rubicon. They want to get paid and are tired of coming to work every day. But when somebody else starts telling them what they’re going to do with their business they don’t like that, and they’re unwilling to turn over the reins.
Hurley: Do those deals ever get done?
Frieden: No. [These kinds of owners] decide they want to sell and start a process. However, they over-negotiate everything and end up blowing up the deal. Every point evolves into a price negotiation. They want a zero-risk sale, at 10 times earnings, and they want it in cash at closing with no deal protections for the buyer.
The first thing I try to find out is whether they really are a seller and why they’re selling. That is critical. Next is to understand whether they have a franchise that could be appealing to buyers. If you have to sell, you don’t have a whole lot of leverage. If you have a company that has some successors, a decent client base, and no compliance problems, you have choices.
Hurley: And buyers’ mistakes?
Frieden: Many target companies have real problems—clients aren’t sticky, there are compliance or personnel problems. I think the buyers who are going to be successful are going to be able to scope out the difference between real problems and the ghosts. They are going to do enough diligence to avoid real pitfalls but, at the same time, they are going to have some tolerance. They understand that all firms have problems.
Hurley: What should a buyer be looking for in a seller?
Frieden: You want selling owners who want liquidity bad enough that they want to move along and not be there forever. They also have a good enough relationship with the next [generation] so they can get everybody else across the Rubicon to get the deal done.
Hurley: That’s often a big problem.
Frieden: Yes. There are a finite number of dollars or shares or units that a buyer is willing to dole out to get the deal done. And they are being split between the founders—who are leaving—and the successors who want a bigger share of the pie.
A buyer is potentially dealing with a four-headed monster. It has a capital source as well as other buyer shareholders to which it must convey why this is a good acquisition. On the other side of the table, it must deal with founding sellers who want as many dollars as possible and next gen people who it is relying on going forward who are focused on their personal economics. It must persuade the latter of the unknown—that their upside in this going-forward venture is greater than they have now so that they want to paddle hard alongside the buyer going forward.
Founding owners also often do not care a whole lot about the culture of the acquiring firm or its personalities. They don’t have to live with it for 20 years, and although they sincerely care about their clients and employees, it doesn’t cost them dollars and cents if the [acquirer] turns out to not be what they thought.
On the other hand, the next gen are in bed with the buyer potentially for the rest of their career. They are being asked to “trust” a buyer with whom they may have little background. They also are going to be party to a shareholders’ agreement that may be less accommodating than what they currently have, and they also may have to agree to more restrictive non-competes.
This all points back to the importance of being a seasoned acquirer. Because they have done deals, they have credibility and the seller’s successors can talk with people at the firms that they have acquired, which often helps with the “trust me” factor.
Hurley: Do buyers generally pay about the same?
Frieden: I don’t think it’s an exactly efficient market, but it’s pretty close.
Hurley: What then determines the winner?
Frieden: Several things. Sellers want and need to look credible to their clients and employees—the deal and the buyer must make sense. Dating is also involved. Convincing somebody to sell to you is hand-holding at the right times to make them feel good about the process.
Hurley: And the role of a pre-existing relationship?
Frieden: If you have a trusted relationship with somebody who’s selling, it will be a much easier transaction for them. They’re going to feel more comfortable.
Hurley: What’s the most surprising thing you’ve seen happen in the industry over the last decade?
Frieden: The evolution of companies into having real value. It’s great for the owners; they have something to sell. But not just that, it’s good for the employees. These people may have a significant opportunity going forward; they can build a career and personal wealth rather than just having a job. It’s good for the clients, too. They have a place to stay for generations.
Hurley: What will be the biggest surprise in the industry over the next 10 years?
Frieden: Client demands are going to change. [Wealth managers] currently are trying to figure out who their clients are. Am I catering to ultra-high-net-worth, high-net-worth, mass affluent? The demands of those clients and what they’re willing to pay is going to change. It will be hard for wealth managers to deal with, particularly at scale.
Also, as more people and money flows into the industry, larger numbers of regulators and plaintiffs’ attorneys will start to show up. If you look at the banking industry, compliance is your A-number-one risk, or the first box that you’re going to check if you’re looking at a deal.
Hurley: Thank you.
Frieden: Thank you.