‘Sell and Stay’ Is the Norm for RIA M&A Deals

Most firm owners say they would prefer to ‘sell and stay’ for a defined period of time after a deal closes—and ultimately participate in the growth opportunities created by the combined entities.

Last week, PLANADVISER reported on some of the findings from Echelon Partner’s registered investment adviser (RIA) and wealth manager merger and acquisition (M&A) summary analysis for 2020.

In addition to mapping out the record pace of M&A action, the Echelon report highlights the fact that “breakaway” activity remains strong in this industry, even as so much emphasis is given to the strategic M&A deals. The report describes “breakaway” activity as “a relatively underappreciated phenomenon that increased in prevalence over the past decade.”

Another timely topic explored in the report is the reason(s) cited by RIA owners for why they were motivated to engage in a given transaction. According to Echelon’s analysis, there appear to be three primary and common objectives mentioned by sellers.

The first objective is the ability for firm’s owners to “sell and stay,” meaning they plan to remain engaged in their business for a defined period of time after a deal closes. This approach means they can ultimately participate in the growth opportunities created by the combined entities. Numerous deals reported recently by PLANADVISER fit this character. 

“A growing number of deals in 2020 were structured to enable this alignment, which is designed to benefit both sellers and buyers, and creates the potential for higher deal valuations if post-close targets and goals are met,” the analysis explains.  

The second main theme is one that is obvious and well appreciated: unlocking growth and synergy values.

“The number of buyers, their maturity and the benefits of scale that institutions can provide to advisers were key considerations for many sellers in 2020,” Echelon reports. “Sellers now have a greater ability to tap into larger, national firms that can often introduce a wealth manager to new markets, a deeper set of prospects and advanced marketing capabilities.”

According to Echelon, as buyers have built up their infrastructure and worked to centralize their resources, sellers have more options to offload their technology, investment management or other “non-core operations.”

“In the process, sellers acquire the time, resources and capacity to focus on accelerating organic growth and increasing the value of their businesses,” the report explains.

The final primary motivation cited by RIAs and wealth managers is career development and growth opportunities for “G2,” i.e., the second generation of leadership.

“As founders sought to initiate their transitions out of the business, buyers that could present career paths and continued growth opportunities to remaining employees were particularly attractive to sellers,” the analysis says. “A typical $1 billion RIA, for example, can often have 15 to 25 employees. Continuity in the business—for clients, employees and the buyer—is an essential ingredient for a successful integration and long-term growth.”