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Practice Management > Succession Planning

Advisors Cash In On M&A

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The advisory world has witnessed a great deal of mergers and acquisitions (M&A) activity in the past few years, leaving many advisors not only wondering what the future might hold for them and their investment practices, but also how they can best manage their businesses to benefit from the trend.

An analysis of this M&A trend shows that buyers aren’t just looking to grow or penetrate new markets. Instead, many large RIA firms are looking at mergers and acquisitions as a substitute for their organic growth strategies. On the other hand, for smaller firms, merging is more of a defensive strategy by which advisors and professionals from different firms join forces in the hopes that newfound synergies and cost savings will allow them to compete with larger entities.

Principals are increasingly taking measures to position their firms for a possible sale or merger. Ten percent of the principals surveyed in the 2005 AdvisorBenchmarking study cited the purchase of another practice as their top goal (up from 5% in 2003), while the percentage of RIAs who positioned their practice for purchase shot up to 30% from 20% in 2003.

Let’s take a closer look at the profiles of the advisors whose goal is to position their practice for sale, as shown in table 1 below.

Financial Profile of Firms Positioning Practice for Sale

Median number of employees


Median assets under management


Median number of clients


Median revenues/client


Median growth rate


Again, firms that find the idea of merging most appealing tend to be much smaller in size, as they are less likely to hold their own against the growing competition in the marketplace.

Despite an increase in the time spent managing portfolios and dealing with compliance (see PracticeEdge, August 2005), succession planning is an often ignored issue that investment advisors face. Just 34% of financial advisors overall have developed succession plans for their firms, down from 37% the year before.

What’s the plan?

By examining the types of succession plans advisors find most appealing, one finds an interesting trend. The objective of most RIAs with succession plans surveyed (27%) is to sell the practice to an existing partner, while 25% intend to sell their practices to an existing employee and 23% propose to close the firm and refer their clients to others. Only 11% intend to sell their practice to an identified third party. The takeaway here appears to be: advisors prefer to do business with those they both know and trust.

Sealing the deal

Another note of interest is how most of these mergers are finally actualized. According to our data, not many buyers make lump sum payments. Instead, the most common way to pay for a practice is via a payment plan. Eighty-eight percent of advisors who plan to sell their practice to an existing employee implement a payment plan and 69% do so when selling to an existing partner.

Some action steps

Regardless of your firm’s size, if you are contemplating M&A activities–whether selling your practice or buying another–there are three things you should consider:

1. Benchmark yourself against your peers in the marketplace. Why? It will give you a better assessment of what your firm might be worth, as well as some ideas to enhance your firm’s worth. Analyzing several firms in the marketplace can offer you such insight.

2. Consider how you want to be paid. If you want to be paid in a lump sum, selling to an employee is likely out of the question. Knowing your method of payment is an important succession plan factor and will drive many of your other decisions.

3. Plan ahead. No matter what your circumstances–merger or no–you should have a succession plan or exit strategy in place. If you plan on selling, create a game plan for determining your firm’s worth, set a timeline for exiting, identify potential buyers and consider ways to enhance your business model to make it more attractive. Sellers with succession plans in place enjoy a smoother exit process.


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