Valuation
How is your practice being valued, who sets the valuation, is there a competing offer and what is the industry average valuation for comparable practices?
Total AUM, revenue, number of clients, revenue per client, profit margin, annual growth rate, compliance track record and staff loyalty are crucial components for many valuations. But, for example, if your practice has a strong growing niche, total AUM and number of clients may be less important than annual growth rate. Or that could just be how you see it. If the other party deems profit margin and compliance track record as the deciding factors, the valuation process could get tense.
If the seller is in discussions with another buyer, or the buyer is in discussions with another seller, that party has more room to negotiate valuation than if no competing offer exists. And the closer the valuation is to an industry average, both parties are likely to have greater comfort.
Fit
Perhaps one of the most important but complex considerations is whether the M&A partnership is a good fit, for you and your practice. Sellers may become blinded by the payment windfall, while buyers may overlook a seller’s quirks in the quest for growth.
A successful merger is based on mutual respect for the culture and personalities each party brings to the partnership. Often the nature of the parties plays a big role. Private equity shops may be less collaborative than pure RIAs, hybrid RIA broker-dealers may be more compliance focused than other buyers, and pure RIAs may be dependent on a single individual for direction.
Far too many deals seemed great on paper only to collapse under the strain of daily work life.
Truly getting to know the other party, their work culture and what makes them tick, from the executive level down to essential staffers—before finalizing the merger—is the best way to determine if the fit is right.
Alex Chalekian is the CEO of Lake Avenue Financial, a wealth management firm based in Pasadena, California.