Wealth Management M&A Tips: Acquisition Preparation for Advisory Firms

Acquisitions in the financial services industry are guided by the search for value. Firms considering selling or merging their practice must be aware that today’s buyers are seeking ways to unlock future advantages by acquiring the ability to scale effectively. This trend persists in a still-fragmented marketplace where consolidation is increasing in velocity and changing the entire competitive landscape in the process.

Advisory firms that possess a distinct set of modern growth-driven capabilities and attributes will be particularly attractive acquisition targets going into 2023 and beyond. And for those looking to acquire, an attractive seller is a prepared one. This is an environment where getting ready for mergers and acquisitions (M&A) deals is not only a smart bet, but it’s also a strategic safeguard that helps ensure your firm is operating at full efficiency while displaying the optics most attractive to the biggest buyers in the market.

The following is a roadmap with the raw materials, perspectives, and insights needed to properly assess a potential sale, in addition to helping to position your firm as a compelling wealth management acquisition target. While we’ll focus primarily on the sell side, this expanded analysis of the M&A outlook and key stakeholder needs also provides critical information for those looking to execute a merger as well. This M&A guide will do three things to help:

1. Discuss: The 2023 Wealth Management M&A Outlook
2. Identify: Perspectives & Considerations for Key Stakeholders 
3. Provide: Due Diligence Checklist & Value Enhancement Tips for Sellers 

The Acquisition Outlook for 2023  

The past decade has seen a huge perception shift around consolidation in the wealth management space, with 2022 being another banner year for M&A transactions and interest.

But how will 2023 stack up? Overall, analysts expect the deals to continue in 2023, albeit at a slower pace than the breakneck speed we saw in 2021 and 2022. But this is only expected in the first half of the year as a confluence of yet-to-be-resolved macroeconomic issues, such as the uncertain rate environment, inflation expectations, and the Ukraine War, will likely keep deal volume low over the short term. Once we have more clarity on these issues, it is likely deal flow will pick up in the second half.

So, rather than a cause for concern, a temporary slowdown can be considered an opportunity to optimize. Now is the time to understand what buyers are looking for, think deeply about your own rationale for selling, and take steps to upgrade your firm structure and strategy to get ahead of peers and create an attractive, value-added financial advisory industry acquisition target. Buy-side wealth managers and Private Equity firms are constantly surveilling the landscape, so if you wait around for more certainty, the opportunities might end up passing you by.

“As more companies use M&A to build scale economics and acquire today’s capabilities that will become tomorrow’s table stakes, those that sit on the sidelines are likely to end up staying there.”

-Bain & Company

In the following section, we’ll identify and explore the key acquisition considerations that firms must keep in mind to position themselves favorably for what is looking like a pickup in deals in the second half of 2023.

Financial Advisory Firm Acquisitions: Stakeholder Perspectives & Considerations 

To have the most effective perspective going into an acquisition, you need to acknowledge and factor in the various viewpoints of those involved. As the seller, viewing the situation through not only your lens but the buyer's lens as well will allow you to prioritize key considerations and position your firm as a true value-add.  

39%
Identifying a suitable partner is the top barrier to acquisition
DeVoe 2022 RIA M&A Outlook Study

But always keep in mind that this is decidedly not just a two-party transaction. Financial services is also a relationship business, and we cannot ignore the most important stakeholder in all of this: the client. A comprehensive three-sided perspective will allow for a complete view of the deal dynamics, which should translate into a seamless, low-conflict transaction where all stakeholders’ interests are accounted for in good faith. Here are the most important stakeholder perspectives and considerations when assessing an acquisition:  

Buyer Considerations 

Buyers are looking for value. They want to make their firm more efficient, more capable, and more impactful. They want to increase competitive advantage by growing proactively and intelligently. 

Modern buyers have a distinct set of needs when considering acquisition targets, with the most important related to growth in its various forms. The following ranked list is based on responses to a buyer priority survey by DeVoe & Company: 

1. AUM Consolidation (49%)
   Still highly fragmented, wealth management is seeing gradual consolidation, with power players buying up smaller outfits to increase advantage by maximizing AUM in an increasingly competitive market for HNW clients. 
2. Talent Acquisition (42%)
   The right personnel can make or break a firm, and with a talent arms race currently underway across the entire finance landscape, having a group of established key talent can have an outsized effect on the final asking price.
3. Regional Expansion (34%)
   While technology can provide scale, geographic considerations are still important, with client service continuing to be a major factor in successful wealth management. Buyers are currently looking for higher growth adjacencies. 
4. Extending Capabilities (29%)
   There is an ongoing need for technological innovation, with buyers understanding the value of a strong technological underpinning and unique capabilities when integrating services and boosting scale. The two pillars of expanded capabilities are:
   1. Technology
      Ability to expand infrastructure and add digital platforms
   2. Services
      Adding key future service value drivers like alternative investment and direct indexing options

Seller Considerations 

Sellers want certainty. Firms looking to sell want a solid plan related to a full exit or organizational integration. They want a buyer who is also a partner that can take what made the firm unique in the market and integrate those value drivers into the acquiring firm’s organizational structure in a seamless and healthy way. 

For sellers, the value of a deal might not be growth-related at all, but rather more focused on fit and succession considerations.  

1. Culture
   This cuts both ways, with culture being a critical component for sellers and buyers. Integrating disparate work cultures is difficult in the best of times and a complete dealbreaker in less favorable macro environments. Matching cultures is highly beneficial for the arduous onboarding and transitioning process, in addition to helping avoid client service disruptions.
2. Technology
   Technology becomes core to the wealth management space. Knowing what platforms, programs, and systems are being used can shed light on how complex a technical transition would be. This is vital, as upgrading or transitioning technology is a capital- and time-intensive process.
3. Ease-of-Integration
   While this flows naturally into both culture and technology, ease of integration also includes clients, personnel, service models, and fee structures. Being acquired means your clients and your employees must integrate along with you because if key stakeholders don’t transition as well, then the deal loses major value. 
4. Firm Timeline
   Factors like age and long-term firm plans must be considered as well. Are you an older wealth manager with a mature book of business and no real succession plan? Seek a buyer who wants access to that established AUM and client base (+ a transfer of wealth opportunity).

1 in 4 
Advisors unsure of succession plan
Cerulli Associates

On the other side of the coin, are you a young firm looking to take the next step towards growth? Attract an established buyer interested in bringing on up-and-coming talent who can lead their firm once the aging principles retire. Considering the age breakdown of the wealth management industry, this could be a sound strategy.

J.D. Power 2019 Financial Advisor Satisfaction Study

Client Considerations 

Clients demand strong relationships, service, and support. If the deal does not consider these keys, then an acquisition or merger may not be in your best interest as a firm. A service-oriented industry must consider the end client, or the business model will fail to reach full value. The primary focus here is on front-facing technology and personnel, so make sure to look at client impact closely:

1. Transitions & Technology
   Wealth management clients tend to take a more a hands-off approach to investing, especially on the administrative side. Therefore, keeping clients happy during an acquisition relies on streamlined onboarding and technical transitions to the acquiring firm.
2. Point of Contacts
   Being a relationship business, investors like having a familiar wealth management advocate at their side, which can be thrown into disarray during an acquisition. Assess front-office relationships to ensure that clients are not placed in an untenable situation that will likely lead to them moving their money elsewhere.
3. Philosophy
   Clients are not won on performance alone. They have to identify with your philosophy as well, and acquisitions can create an identity crisis when it comes to vision alignment. It is paramount to sell to or merge with a firm that upholds a similar philosophy to help maintain client peace of mind in knowing their best interests are still being looked after.

The Definitive M&A Checklist

Equipped with the proper perspectives, you can now start focusing on what is specifically needed to be prepared for being acquired. Here is an acquisition checklist to ensure sellers have everything necessary for a successful transaction:

• Business Review
  Detailed information on clients, revenue, structure, documentation, marketing, and listings forms
• Client Base
  Check ease of transferability through a detailed description of client demographic breakdown
• Accounting
  3+ years of tax returns, credit reports, audits, UCC filings, formal valuations, and written evidence the buyer is capable of purchasing (seller only)
• Legal
  Contracts and agreements, including property leases, joint ventures, marketing agreements, insurance policies, vendor agreements, operating agreements, and bylaws
• Cybersecurity Risk Analysis
  Security and vulnerabilities evaluation of physical & virtual systems, privacy, and data security policies, information on previous security breaches, and the location of sensitive information
• Regulatory Compliance & Licensing
  Securities and business licenses/permits, FINRA status, regulatory audits, complaint/dispute documents, regulatory reports, litigation, investigations
• HR & Employment
  Full employee information (licenses, roles, salary, benefits, bonuses, location), employment agreements, bonus agreements, stock ownership/profit sharing plans, non-compete agreements
• Operational Assets & Personal Property
  Inventory all assets, check for recurring costs, and assess personal property assets for UCC filings
• General Terms of Transactions
  Down payment, financing terms, collateral, promissory notes, non-compete agreements, life and disability insurance, referral compensation, dispute resolution, transition expectations

Value Enhancement & Best Practices in Wealth Management M&A

Before looking at specific ways to position your firm to maximize its value in the marketplace, it’s important to identify the methods with which buyers are utilizing to evaluate potential acquisitions.

This tends to revolve around three valuation approaches:

• Market Value
  determine valuation by considering market prices of comparable assets
• Discounted Cash Flow
  investment viability based on future cash flows
• Multiple of Revenue
  determine maximum value by calculating recurring and commission revenue.

For reference, here are revenue multiples breakdowns by both firm size and region:

Source: 2022 Advisor M&A Review: Current Data and Trends for Financial Service Professionals

With an understanding of the financial due diligence undertaken by the acquiring firm, we can look at a few ways to enhance value through both upgrades and optics:

• Upgrade Your Technological Process
  Ensure your tech infrastructure is modernized and future-proof to create a strong value proposition through digital awareness and ease of transition.
• Maximize Your Enterprise Value
  Make sure your books are clean and tidy while finding opportunities to increase EBITDA prior to the financial due diligence stage.
• Optimize your Branding
  Strong brand recognition and reputation WILL increase value. Rebranding or upgrading your marketing prior to acquisition can have an outsized effect on asking price.

To learn more about enhancing your value as a firm, starting with your value proposition, read How to Deliver a Value Proposition That Drives Business Growth

Best Practices in Wealth Management Acquisitions

Knowing how to approach the buyer-seller dynamics of an acquisition in wealth management is paramount in ensuring a clean and secure process for all stakeholders. The following details two distinct examples of financial advisory M&A best practices.

Collaboration & Communication

Mergers & acquisitions are highly charged processes that require mental fortitude, constant analysis, and true professionalism. This makes communication, honesty, and accuracy all imperative when undertaking the challenge.

So, if there was one word that brings all that collaboration and information together, it would be: transparency.

Clearly conveying objectives, financial disclosures, operational strategies and potential pitfalls will only improve the results, either by optimizing the deal to reach its maximum value or uncovering deal-breaking issues that could sink the process.

Online Data Rooms

Preparing for M&A requires quite a bit of information and data transfer, and with cybersecurity risks involved, having a secure data room can be a huge time and cost-saving benefit to the process. Essentially a digital warehouse of key documents, these data rooms should include:

• Corporate Documents
• Financial Statements
• Contracts
• IP Information
• Client Information

A data room not only helps preserve confidentiality but also provides that key variable today’s buyers are seeking: a responsible partner.

Conclusion

There are few industries with more attractive M&A potential than wealth management, a fragmented space where performance, process, and personnel need to operate at their optimum at all times. This makes preparation for acquisition a prime consideration for all sizes and types of financial advisory firms, not only to help position optimally amongst your peers, but also to ensure your organization runs efficiently while signaling positive optics to buyers in the process.

AssetMark understands the complexity and value of intelligent assessment and preparation for a wealth management acquisition and is here to provide the resources and trusted support to ensure your firm understands its value and is positioned favorably in the wealth management marketplace.