As one of the finest M&A transaction lawyers in the country, my law partner Dan Sheridan provided insights on the recent merger and acquisition explosion in our industry.
DeVoe & Company’s RIA Dealbook states 2019 is on track to be another record year for M&As involving RIAs. The drive towards consolidation and greater economies of scale, together with an ample supply of cash from private equity sponsors, continues to fuel what was already a very hot market.
In terms of fundamental deal structure, Dan said most transactions continue to fit into a fairly straightforward template. The first element is a split of purchase consideration between cash and buyer equity. The second element is a split between consideration payable at closing and earnouts payable over time, usually based upon some combination of client retention and achievement of growth targets.
There are wide variations in the relative proportions of cash versus equity and closing payment versus earnout, which tend to be dependent upon seller motivation and goals. For example, a selling advisor whose active time horizon is more than seven or 10 years is more likely to accept a greater proportion of buyer equity as well as lower proportion of closing cash. However, an advisor who is nearing retirement may not be interested in a large equity stake (especially one that is illiquid) or in taking substantial risk on client retention or growth.
Buyers also have their preferences. If a buyer wants to simply grow AUM and capitalize on efficiencies, they are less likely to offer equity as part of the consideration. Instead, they are more likely to emphasize earnout payments over closing cash. In some instances this may be perfectly acceptable, especially for a small RIA looking for some return on the goodwill value of his or her business prior to retirement.