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Industry Spotlight > Mergers and Acquisitions

What’s Stopping You From Doing a Deal?

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What You Need to Know

  • Only 16% of RIAs surveyed say they have a defined strategy for executing an M&A transaction.
  • Change of control, client experience and employee impact are three key barriers to a smooth M&A process.
  • Determining activities an owner is willing to relinquish or delegate ahead of time can help avoid potential deal breakers.

Merger and acquisition activity in the advisory industry has been strong. Yet, for all the enthusiasm and momentum, many RIAs who want to implement a firm purchase or sale are not moving forward.

As indicated in Dimensional Fund Advisors’ 2020 Global Advisor Study and in our interactions with advisors, there are relatively few advisors (16%) who say they have a defined strategy for executing an M&A transaction. Uncertainties — particularly among sellers — in three key business areas often form barriers to a smooth M&A process: change of control, client experience and employee impact. Let’s consider each:

Business Control

The two most common deal breakers for advisors are lack of investment philosophy alignment (83%) and cultural fit between firms (82%), according to the study. Looking deeper, we often find that owners are concerned about maintaining control or influence in these areas after the transaction.

I often ask business owners, “If you had every resource available to you, what would you want your daily activity in the business to look like post transaction?” Their responses often reveal the level of business control they want. This preference does not apply only to an external partner.

A large RIA recently said the firm’s internal succession discussions were stalled due to a lack of clarity on the level of control the selling advisor wanted after the initial transaction. The control requirement can present an emotional landmine, and a purchaser may acquiesce out of respect for the seller or concern for the deal.

The risk is that the buyer may never fully realize autonomy for the financial investment if the seller continues influencing the day-to-day business. Ongoing and candid conversations prior to finalizing an agreement are imperative.

One seller we often see is the “reluctant CEO.” Clearly, most successful owners have developed multiple business and leadership skills. Yet, as CEO, they must devote time to activities they consider unfulfilling or time wasters.

Their main priorities are to serve clients and build a revenue stream, and so many leaders would gladly shed certain responsibilities, such as sourcing talent, selecting technology or managing compliance.

As a former COO, I would suggest that preserving and managing revenue are just as important as driving it. But by recognizing capacity constraints and determining where to add the most long-term value, you can clarify essential areas of business control.

Why is this important? Determining activities you are willing to relinquish or delegate — even if you are motivated by a lack of capacity or skillset — can help avoid potential deal breakers while forming your M&A strategy.

Client Experience

More than 60% of study respondents were contacted by at least one interested buyer in the past three years. Given the competitive landscape for acquisition, sellers should consider their current client experience differentiators and what gaps in their current offering a buyer or new partner could help close.

Also, consider how the first conversation with top clients will unfold when you share the news of the firm sale. How might you demonstrate the value to them?

Also, one way to assess client impact is to closely examine alignment of the two books of business. I frequently ask owners, “When you look at the book of clients, keeping in mind the services provided and client profiles, are these clients you would work with normally?”

The numbers and deal structure may look great on paper, but if client needs and the firm’s services do not align, you may experience challenges down the road. I’m often asked, post transaction, about unexpected inefficiencies in technology, unprofitable clients, and service team redundancies arising from a lack of planning or a decision to “figure it out on the other side.”

An improved client experience will not happen on day one, so consider a path and timing for service improvements. Your strategy can impact profitability and productivity.

Impact on Employees

People are both your most valuable asset and the highest cost. A transfer of ownership and control can significantly impact employees professionally and emotionally. Sellers should consider that some employees may experience a shift in responsibilities, and certain roles may not be needed because of redundancies.

The anticipated impact on employees can create an impasse for many sellers. But human capital changes are inevitable in most deals and might be best addressed by negotiating exit packages for employees who may need to leave rather than by insisting that all employees stay.

Industry metrics suggest that the seller’s market will continue. So, too, does interest in an outside partner as a potential financial and strategic resource to support an internal succession. Building a detailed, well-considered strategic plan is more important than ever and differentiates those firms actively implementing an M&A strategy.


Catherine Williams is head of Practice Management and vice president, Dimensional Fund Advisors. Based in the Charlotte office, Catherine delivers benchmarking and practice management insights to advisors. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.