One of the proven ways to increase revenue and scale your existing advisory practice is to acquire or merge with another firm. Mergers are also a solution to gain instant scale by aligning with a larger firm.

Whatever your reasons, there is a process to buying an RIA. It’s not something that you should venture into without first doing your homework. In this article, we’ve laid out some helpful tips and strategies to help you successfully complete an acquisition.

If you are interested in gaining scale and merging your firm, Bridgemark Strategies can help you assess your strengths and weaknesses. We will work closely with you to help you find an appropriate partner to align with to gain scale. Learn More

Examine the Existing Culture of the RIA

No matter what changes you plan on making, you’re still inheriting the existing culture of a firm that is accustomed to doing business a certain way. Will your operational requirements cause a serious upheaval, or can their team be absorbed into your system?

Significant modification of an existing advisory practice can skew the numbers you’re evaluating before the sale is closed. Changing too much could result in lost clients and declining AUM. That defeats the purpose of bringing a successful firm under your umbrella.

Truly understand the culture and philosophy of an RIA before putting a number on the table for the acquisition. Make sure you can work with the people who are there. It’s okay to consider a move of a few key players and even cut a position or two, but it’s best for the firm to stay mostly intact.

Have an Accountant Verify the Financials

Income and debt are two of the primary variables in determining a proper valuation for an RIA sale. You’ll also want to look at comparable market value and determine the future growth potential of the firm. An accountant or valuation expert can help you with all of this.

This is an important step. As a financial advisor, you’re perfectly capable of doing the math yourself, but an accountant is trained to analyze balance sheets and look for red flags in the financial reporting. That type of scrutiny is necessary when buying an RIA as with any other acquisition.

An accountant can help you understand exactly how your acquisition target makes money. Are they AUM-based, hourly, flat fee, or commission-focused? Is that model sustainable? The results may impact the terms of the deal, and you may need to make some changes in these areas after you close, especially if you charge different fees than the acquisition target.

Have Your Attorney Create a Buy/Sell Agreement

Financial advisors, in most cases, are not attorneys. Even if you are, it is a good idea to work with an attorney to handle the acquisition for you. With no personal investment in the company, an impartial legal representative can draw up a buy/sell agreement.

One of the key responsibilities here is to outline the expectations of both the buyer and the seller. You’ll also want to sit down with existing staff members and any other advisors involved with the firm. Discuss employee duties, business practices, and internal leadership structure.

Ultimately, buying an RIA is a business deal. That doesn’t mean that there won’t be some real human emotions involved. The seller has an emotional attachment to his or her firm, as do their employees, so reassurances will have to made.

Valuation is Not a Multiple of Gross Revenue

One of the most common misconceptions about RIA acquisitions is that the value of a firm can be determined with a multiplier of gross revenue. The reality is that two firms with the same income could have a very different cost structure and growth rate—so they would not be valued the same.

Another factor to consider here is that the seller may not be able to maintain the same revenue stream after the sale. A percentage of the firm’s clients may go elsewhere when their advisor is no longer in the picture. It is wise to play it safe and plan ahead for an income decline in the first year.

A potential solution to help mitigate income decline is to keep the principal advisor on board while you’re making the transition. This is actually fairly common. Many advisors sell their firm to transfer business responsibilities, but they want to maintain a lifestyle business managing a few clients.

With larger firms, there may not be an income decline at all. These are firms that have already achieved scale and typically have multiple advisors in the mix. A transfer of ownership, shouldn’t have a significant impact on revenue numbers.

Work with Bridgemark Strategies

Bridgemark Strategies maintains an active list of advisors interested in buying or selling their RIA practice. We also track partnership opportunities if you’re interested in exploring a merger with another firm. Our experienced consultants can help to guide you through the complex M&A process. Reach out to us today if you’d like to learn more.

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