RIA firms looking to offload their practices find themselves in “an unprecedented sell-side market,” according to a lawyer who specializes in deal advisory firms. However, a firm's success may depend on its ability to show true organic growth.
Ted Motheral, a partner with Potomac Law Group, said he's seeing deal interest among all levels, from smaller RIAs looking for legacy plan clients to grow their business to larger acquirers such as Wealthspire and Carson, who are looking for strong multiples. -generational succession plans and a diverse customer base.
“If it all aligns, if you have a strong Gen 2, if you have strong organic growth … you're going to get multiples in that space,” he said.
But many speakers during the first day of Wealth Management EDGE at the Diplomat Beach Resort in Hollywood Beach, Fla., from Motheral and Bluespring Wealth Partners vice president of Corporate Development Tom Valverde to Pat McHugh, head of focused private equity investments in the industry firm Constellation Wealth Capital, emphasized that organic growth supported by the market would not be enough.
According to Valverde, when Bluespring assesses a firm's potential value for a sale, it looks for “true ensemble practices” with a second generation already in place.
Bluespring would also like to know that a firm's AUM did not rely on a small number of UHNW clients and that its organic growth was based on net clients and net new assets, not just market action. According to Valverde, a diversified customer base and organic growth would be the two biggest drivers in increasing the multiplier on a potential acquisition.
“You're leading with financial planning, or tax planning or other core services, not just investment management,” he said.
McHugh echoed this sentiment, saying that the private equity firm looked for partners where the firm's organic growth was diversified across different channels and sources in the organization to ensure it was scalable (and not unnecessarily vulnerable). He also sought out firms that nurture the next generation of talent, calling it a risk to the industry that keeps him up at night.
“I'm not saying you have to guarantee crazy, outlandish salaries to compete with those other industries,” he said. “But you know the opportunity over 10-20 years in this space is very compelling, and the way to bring that to life for individuals considering this space is to be more open-minded about long-term incentive plans.”
But growth must be a proactive process, including budgeting for resources, people, technology and time, according to Lisa Crafford, managing director and head of consulting at Constellation, who said it was becoming more challenging to grow without that mindset.
During her conversation with McHugh, Crafford recalled her previous job at Pershing, where she worked on benchmarking studies and how megafirms would consistently outpace smaller firms in growth as a percentage of business.
“Those bigger firms were growing because they were investing in their growth,” she said. “They were doing marketing, which is actually one thing, and not just having a website or going on a golf outing once a year and hoping people will Google you later.”
However, Allan Boomer took a different approach with his firm, Momentum Advisors, where he is a managing partner.
The firm's growth was steady, but he had no intention of selling, saying he valued the diversity he had created at the firm and that the partners were all in their forties and not looking to move on. Boomer said they never would have thought to achieve a certain amount of annual asset growth, but they were achieving exponential growth nonetheless.
“Growth is a byproduct of doing a lot of things right, as opposed to aiming to grow,” he said.