What to Know Before You Grow: An M&A Primer

RIA firms have two paths they can take to grow their business: Organic and inorganic growth.

Organic growth is all homegrown. It involves adding clients through referrals, leveraging marketing and communications channels, and growing your team to expand your reach. Inorganic growth, on the other hand, primarily involves growing through the acquisition of another existing firm.

Both strategies have merit, but inorganic growth has seen an upward trend among RIAs over the past few years, and it isn’t showing any signs of slowing down.

Despite being quite a chaotic year, Q4 2020 saw a record number of deals among RIAs. The first quarter of 2021 went even higher—setting another record with 58 total M&A deals. As a growth-minded advisor, M&A can be one of your top options for rapid and scalable advancement, but that isn’t necessarily a simple endeavor. 

Today, we’ll look at the various paths you could take to grow your firm through inorganic growth.

Merging Two Firms

Merging two companies into one is a delicate process, no matter how well acquainted both companies are with each other at the beginning.

Even though there are growing pains, they’re often worth the added benefits you can gain by combining your resources, contacts, and employees with those of another.

While a merger or acquisition deal can look incredibly similar from the outside, there is one especially noticeable difference: In a merger, the C-suite typically shifts to reflect leadership from both firms involved, rather than in an acquisition where the acquiring firm may represent the total ownership.

If you’re considering a merger, ask yourself how both firms will be fairly represented.

Acquisition Options for RIAs

Acquisitions come in many forms, including:

1. Cash buyouts

These are the simplest (and probably rarest) of all acquisition strategies. One advisor gives the other cash, and the other gives up control of their firm or book of business.
Of course, it’s never actually that simple. For most RIAs, raising the money you would need to pull off a cash deal would require extensive capital campaigns.

2. Earnout

As the buyer, you are naturally inclined to save money, while the seller has a vested interest in getting everything they can out of the sale of the business they’ve devoted themselves to for sometimes decades. It can be hard to find a number that pleases everyone.

Can’t agree on a price? An earnout plan can help both parties see more eye to eye.

These deals typically require far less upfront cash in exchange for an ongoing built-in revenue sharing model that will last a set number of years post-acquisition.

3. Minority Interest

This is the “How do you eat an elephant?” strategy (one bite at a time).

By acquiring less than 50% upfront and then paying out the rest over time, you get the added bonus of additional time to work with and benefit from the wisdom of the previous owner.

Regardless of how you end up growing your firm, it’s important to keep your vision for your own company in mind.

If you find yourself making big concessions on your goals just to make an M&A deal work, then it’s time to take a step back and make sure it’s worth it.

Integrating People and Technology

Getting a deal done at the negotiation table may seem like the most demanding part of M&A at first, but integrating two companies after the deal has been made is a part of the process that can’t be overlooked.

When the ink is dry, the real work begins. Before your firm commits to M&A, first put in place processes for how you’ll integrate your teams together.

A written plan, with workflows for training and onboarding new team members, can get you on the right path. But importantly, a unified technology platform can serve as a core piece of that plan.

Each team won’t be able to continue using different pieces of technology, so a conversion of one firm’s data might be in order. Make sure your technology partners have conversion experts who can step in and help you make the data transition as seamless and well-planned as your team training.

If you put in the time early to map out your plans, inorganic growth can help your firm expand quickly and provide great client service to an expanded audience.

Need help making sure you have the right technology in place to support your M&A plans?

Get in touch with Orion’s experts today to demo our comprehensive wealth management platform.