If you are a registered investment advisor looking to sell soon, the time to start cultivating your second-generation bench was probably yesterday, according to panelists at Wealth Management EDGE in Boca Raton.
Whether it’s bringing second-generation leaders onto the ownership team directly or at least bringing them into the news of the potential sale, a sign that founders have committed players below senior management can often mean a better sale offer to that top levelaccording to numerous buyers and consultants speaking at the conference.
“I think a lot of firms might miss the opportunity to do equity for their employees, because maybe they’re thinking, well, in the long run, I’m just going to sell this externally anyway,” said Scott Leak, director of business development and senior consultant FP Transitions.
He said the mistake is that if a firm has a clear second generation of advisors, “your value will go up if you have G2s that are owners—single-owner firms have less value than multi-owner firms, all other things being equal.”
In addition, Leak said, if there is a junior level of ownershipthey will be more engaged and have more “skin in the game” to make the integration work.
“I would really encourage anyone who has strong talent on your team, and they don’t have equity right now, if they’ve got the will and they’ve got the skill, open that up,” he said.
Henry Hagenbuch, senior managing director, mergers and acquisitions for Lido Advisors, said expanding a firm’s shareholding can also help combat the difficulties of finding and retaining talent after the deal is completed.
At Lido, employees who are not client-facing can get equity in the firm, which Hagenbuch said is a practice they look for in firms they may acquire.
“From our perspective, we recommend that (equity distribution) as an aspect of the deal structure going forward, just so that we can find solves in the fact that the person is bought in and is incentivized,” he said.
Kevin Corbett, managing director, corporate development and strategy for Mariner Wealth Advisors, suggested that the deal process itself may be a moment to bring in second-generation leaders rather than keep them out of what is typically “a very confidential, very secretive process run at the highest levels of the cap table.”
If those up-and-coming leaders are left, he said, they may feel “spooked” or “left out” when the deal is done, and have less buy-in.
“But if they were brought into these discussions and made part of the consideration or part of the process that puts them in the seat to understand fully what the capabilities are, what their career path is and what growth aspects look like,” he said. “You, of course, do it when it’s right for you, but to the extent that you can bring that next generation team into some of these discussions, we see it as being entirely additive to the process.”
Corbett told the audience of advisors that Mariner has completed about 70 transactions since 2012. The most successful, he said, have not only “true next-generation talent” but also a growth mindset, leverage the back-office integration to free up time, and implement some of Mariner’s additional services.
Engaging in those areas has “been a real precursor to success for some of the firms that have grown historically at a much, much faster rate than some of their peers that did not fit one of those three or four categories well.”
On a panel addressing sealing the deal after an acquisition, panelists pointed to the importance of a seller’s ability to engage, buy into, and be aware of their new firm’s wealth technology stack for the post-integration to go well. But the relationship goes both ways.
Ed Friedman, director of business development and growth at Summit Financial, said that an acquirer should be able to show sellers “a better path” with their technology options so they can feel confident about the move.
“Our technology stack, which is ever evolving, is highly curated,” he said. “We’ve done an awful lot of work in the due diligence process of getting technologies and evolving them.”
Even as Summit will try to show firms the best-in-class technology, it also “gives them some flexibility,” Friedman said, noting a few areas, such as financial planning, where firms can work with Summit on options outside the core stack.
Sara Baker, recently appointed EVP of mergers and acquisitions with RIA Allworthsaid that as a firm operating on a W-2 model, it’s essential to see that the seller wants to buy into the technology, its overall mission and its growth mindset.
She described a one-hour call with a potential acquisition in which the firm spent half of the call solely focused on the customer relationship management software, not larger topics related to growth.
“We walked away saying, okay, we know you can follow processes, which is a positive for integration, but felt like overall a terrible fit for the larger integration,” she said.
In the earlier panel, Hagenbuch of Lido said the firms that stand out tend to be enthusiastic about what can be accomplished after the deal.
“We’ve been fortunate enough to enter into partnerships where there’s mutual invigoration for that opportunity—these new partners want to hit the ground running as soon as possible,” he said. “I think if you’re a seller, don’t treat the close of the partnership as an artificial finish line to kind of kick back. Think of it as an opportunity to jump in with both feet to figure out how best to leverage the firm.”
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