Gold rushes are attractive to speculators looking to get rich quick. They’re also dangerous to those who rush in too quickly without planning ahead and consulting the appropriate experts. That’s the risk for young advisors who believe the industry is rife with easy M&A opportunities.
Last year, an increase in smaller transactions dropped the average size RIA merger and acquisition deal to $881 million from more than $1 billion in 2016. Even so, the number of deals set another record last year, and the first quarter of 2018 had 42 percent more deals than the fourth quarter of 2017. So it’s true that a good M&A deal benefits both parties. The caveat is to pay close attention to details, lest you wind up paying dearly in financial and opportunity costs.
One especially tricky area has been carve-out deals, which have exploded in popularity over the past few years. Participating in the partial divestiture of a business unit of a larger company to outside investors, typically through the sale of equity stakes, demands both a deep knowledge of the RIA space and the unique dynamics that go into putting together M&A deals.
Outside of the advisory space, across the broader sweep of corporate history, carve outs have long been rife with complexity. The RJR Nabisco conglomerate went through a notorious leveraged buyout in 1988 that almost immediately turned chaotic. In 2003, Citigroup conducted a risky deal for the credit card business of the faltering Sears, Roebuck & Co. Both instances produced many unanticipated problems down the line.
Young advisors exploring any M&A deal—but particularly carve-outs—should seek a community experience that combines the best elements of structured thought leadership, business coaching and practice management. Mastering the independent M&A landscape requires combining those elements with a digital approach to interactive learning, peer group networking and shared knowledge.
This is the case for both buyers and sellers. But before jumping into M&A in general, it’s worth asking yourself a few tough questions.
Payment
One of the most important items to start with is how to structure payment—cash, equity, or some combination?
As a seller, receiving a full upfront cash payment may free you immediately to fund your future plans, but it could bring onerous tax consequences. But as a buyer, paying all cash might be the least favorable method, unless you have lots to spare or have negotiated a low valuation.
All equity deals, or stock-for-stock mergers, may not work for either party. Equity stakes change in value over time, come with lockup periods and present issues with ongoing control of the merged entity.
Ultimately, many deals feature a combination of cash and equity stakes, with the proper proportions depending on the plans of each party as well as other factors detailed below.