How the big time M&A game is changing

The big RIA buyers are becoming more discerning.

“Acquiring firms, with over $1 billion in AUM, are looking for really high-quality firms,” says David Canter the executive vice president of Fidelity Clearing & Custody Solutions' practice management and consulting arm. “There’s been an evolution in how these firms are approaching mergers and acquisitions, and they’ve become much selective in the kind of firms they want to buy.”

In fact, the number of deals involving firms involving firms with over $100 million dropped 25% last year to 104 deals, from 130 in 2015, according to Fidelity’s 2016 Wealth Management M&A Transaction Report.

Major buyers are looking for growth and scale, according to Canter.

“It’s not about just assembling disparate parts, but how you thread together acquisitions for maximum scale and efficiency,” Canter says.

CAVEATS FOR SELLERS
Sellers who were hoping to cash in on what they thought was a hot M&A market may need to reconsider their business model, according to the report, citing five major turn-offs for buyers:

• A history of limited AUM growth.
• An aging client base.
  
• Insufficient adviser talent.
  
• No viable succession plan.
  
• A spotty or tainted compliance record.

WHAT BUYERS WANT
What are buyers looking for?

• Firms that provide a really good client experience.
  
• RIAs with a similar investment philosophy and capabilities, such as comprehensive financial planning.
  
• A common philosophy on how employees are treated, compensated, trained and utilized.
  
• Compatibility between personnel in the merging firms.

• Advisor strategies
• M&A
• RIAs

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CAPITAL KEY FOR BUYERS
As for the defining characteristics of discerning major buyers, having access to “substantial and sophisticated capital” has become critical, the report says.

“Today, few large RIAs are executing transactions by relying solely on existing cash flow,” the report states. “Instead, these acquirers are drawing on available capital from sophisticated private equity firms and parent investors who find the wealth management space an attractive investment opportunity.”

PRIORITIES FOR ACQUIRERS
Buyers with over $1 billion in AUM are also taking a more strategic and deliberate approach to pursuing targets, focusing on three priorities, according to the report.

• Expand geographically to efficiently build a presence and brand in a new and distant market.
  
• Acquire next-generation talent, who can potentially help supercharge organic growth by providing an array of technical and client-facing skills and leadership potential.
  
• Build density in markets where the acquirer has an existing presence in order to increase scale and gain efficiencies and elevate their brand profile.

VALUATION AND DEAL TERMS
When it comes to price and actually negotiating a deal, terms are more important than a valuation, Canter says.

A valuation of the firm will probably include be multiple of earnings before owners’ compensation, Canter says.

But when structuring the deal, buyers and sellers have to agree on key issues and incentives like client retention, future AUM growth, control and voting rights, a philosophical alignment of how to do business and timing and method of payments, Canter says.

In the end, “deal terms rule,” he asserts.