At conference sessions on advisor mergers and acquisitions, audience questions often focus on firm valuation. “What kind of multiples of cash flow can I expect?” or “How will an improving/declining economy or market affect the price I can get for my firm?” are commonly heard.
But those questions are misguided, argues Ryan Kelly of the Southern California-based RIA firm Spectrum Asset Management. Spectrum has acquired, or as Kelly likes to say, “integrated,” three other RIA firms over the last six years.
For a successful acquisition, Kelly says, Spectrum takes a two-pronged approach. First, any deal must produce “wins” for three different entities: the client, the advisor and Spectrum itself.
Second, to determine whether the principal of the prospective acquired firm will “win,” Kelly will pose a deceptively simple question to the owner and any lead advisors of the target firm early in the discussions: “If we’re talking three years from today, looking back over that time, what do you want to have accomplished, both personally and professionally?”
That three-year time frame is intentional, Kelly says. “Many people will know what they want to do in the first six to nine months” after a transaction, he explains, but don’t often look out two or three years. The answer helps tell him if the acquired firm’s principal wants to remain an advisor.
Kelly also asks that question of other firm leaders. “Their hopes and dreams may be quite different” than the principal advisor, he says. It’s not uncommon that “one may want to stay engaged; the other wants to go off into the sunset.”
Then Kelly filters the answers through the “three wins” lens, giving him insights into whether a deal will yield the right cultural fit for a successful integration.
How do the clients of an acquired firm win? It starts with the culture of the firm, because “not all firms put the client first.” There’s another part of the process that helps retain clients from the acquired firm.
Again, early in the process, if an advisor who cares for her clients “sees a better home for those clients” at Spectrum with its team approach to serving all clients, she will “want to make sure their clients move into that better home.”