Want to Sell Your Firm? Then Get Your Head Right
It’s coming to pass as industry watchers have predicted time and again through the last twenty years. With baby-boomer financial advisors surging into and past traditional retirement age their RIAs are changing hands at an ever-faster pace. But some experts warn this activity comes at a steep price – not least in emotional terms for the seller.
“Selling an enterprise is hugely psychological,” says Peter Alternative of Mirus Capital Advisors, a business brokerage in Burlington, Mass. “We joke in our shop about how investment banking is supposedly all about the numbers when it’s really more about psychology and emotions.”
If that’s true, emotions must be running high among independent wealth firm owners. Last year saw a record number of wealth management RIAs change hands, according to DeVoe & Company, an M&A research consulting firm based in San Francisco. And the same source says this year’s first two quarters also marked new highs for like-period dealflow.
With bigger RIAs and purpose-built consolidators driving transactions, RIAs are selling largely “for strategic reasons, seeking to improve their offerings to clients, expand their services and capture the benefits of scale,” DeVoe & Company says in a summary of 2016 M&A activity in the RIA channel.
But the extent to which sellers truly achieve these ends — and by extension how they end up feeling about their financial compensation when all’s said and done — is worth examining.
In a blunt warning, the Harvard Business Review characterizes M&A as “a mug’s game in which typically 70% to 90% of acquisitions are abysmal failures.” KPMG chimes in to say 83% of M&A deals involving publicly-traded companies don’t increase shareholder returns — and A.T. Kearney says the net return on M&A activity in the realm of traded companies is negative.
Perhaps worse, PricewaterhouseCoopers says 75% of owners who have sold a business end up “profoundly” regretting having done so.
The obstacles to a successful merger are myriad. And for wealth firms — which have to meet exacting standards of legal compliance before, during and after the firms come together — the demands on technological and human resources that come into play for M&A in all industries are magnified.
However much they’re touted initially, a lot of wealth firm M&A deals look bad to sellers in retrospect due to “difficulties among the owners around emotional ties,” says Matt Matrisian, head of strategic initiatives at AssetMark, an investment and technology provider to RIAs. “They can have a hard time letting go and a hard time doing things differently.”
Mirus Capital Advisors’ Alternative explains why. “Small business owners who’ve worked to build a company over 20 or 30 years often have their entire identity wrapped up in something they consider as their close kin, their child,” says the M&A expert.
As a result — and no matter how well they think they’re prepared for business and market contingencies — owners “have trouble giving up control,” says Alternative. “You can’t go from 30 years of calling the shots” to a position of comparative powerlessness “without feeling pain.”
That’s why a lot of sellers don’t make it through projected handover periods under new management. “The time period to make the transition gets truncated,” according to Alternative — often because the old owner can’t stand to see what’s being done with his “emotional virtual child.”
But this resistance isn’t all rooted in ego. “Another part of the emotional roller-coaster” of selling a business is an often deep sense of obligation to clients and staff members alike, according to Alternative. So if an owner thinks her clients are getting a lower level of service or staffers aren’t getting the compensation or advancement opportunities she thinks they deserve, she’s bound to “feel misled” about the deal — even if she fares OK.
Todd Morgan thinks the only remedy for such regret is rigorous due diligence around emotionally-laden aspects of M&A fallout well before a deal is done.
Morgan, chairman and founding member of Bel Air Investment Advisors in Los Angeles, might know, having been through the M&A mill twice.
Nearly 15 years ago, Boston-based institutional asset manager and custody provider State Street bought Bel Air, promising to make it a national name in wealth management. Yet shortly after the deal was inked the State Street executive who spearheaded the deal left, taking with him State Street’s newfound enthusiasm for operating a private-client subsidiary.
Under Morgan’s leadership Bel Air’s management bought the firm back a few years later. This independent interval ended about four years ago when Montreal-based asset manager Fiera Capital became the wealth firm’s second corporate parent.
Largely spurred to the deal with Fiera “by the next generation” of Bel Air executives “wanting to ring the register and buy houses and the like,” Morgan says he was emotionally set to sell after four years because he took the time to look for a buyer that wanted to shape Bel Air’s future in partnership with the firm’s legacy team.
“You’ve got to ask how much they’re going to let you run or how hands-on they’re going to be,” says Morgan, whose firm manages more than $6.5 billion. “But you also have realize you’re not the king anymore; you’ve got partners.”