With the challenges associated with organic growth, many registered investment advisors (RIAs) are turning to external mergers or acquisitions to expand their practices. Nonetheless, with the market for RIA mergers and acquisitions tilted in favor of sellers, it’s imperative for buyers to put their best foot forward when pursuing an RIA. In this article, we will highlight five important steps firms looking to purchase an RIA can take to successfully achieve their goals. For a step-by-step guide to understanding the process for buying an RIA, click here.

 First, it’s vital that prospective acquirors pinpoint their goals with respect to the acquisition of an RIA. Among other things, buyers may seek to purchase an RIA to scale their practice, acquire more clients, expand their product or service offerings, and/or acquire talented personnel. Whatever the goal, advisors can save time by focusing only on those opportunities that are best-suited for achieving the acquiror’s goals.

Second, buying advisors should ensure that they are in a financial position to take on another practice. If the acquiror does not have sufficient cash on hand to consummate a purchase, the acquiror should ensure that it has access to readily-available financing sources to ensure it can consummate any acquisition. It’s also vital that an acquiring firm clean up its balance sheet and ensure that it is in a good financial condition because selling advisors, particularly those that are looking to continue to grow their practice through joining the acquiror’s team, will want to ensure that the acquiring firm is financially stable.

Third, acquirors should ensure that they have the operational infrastructure, products, and/or services in place that will be most likely to attract the types of sellers they are targeting. Acquirors that provide operational flexibility, an open architecture, and a multi-custodial platform are more likely to attract a greater number of advisors looking to join their practice.

Fourth, acquirors should retain a team of advisors designed to support the acquiror through the process. This may entail retaining an investment banker or consultant to assist the firm in understanding the market for the sales of RIAs, identifying potential acquisition targets, valuing potential selling firms, preparing acquisition proposals, and negotiating terms of a potential acquisition. The acquiror should also retain an attorney well-versed in RIA mergers and acquisitions to assist with due diligence on the selling firm; advise the acquiror on how to structure the transaction to best achieve the acquiror’s goals; and draft, review, and negotiate key documents for the purchase transaction (which could include, depending on the transaction, non-disclosure agreements, letters of intent, purchase agreements, and employment agreements). For an article that discusses the steps and documents involved in an RIA merger or sale, please click here.

Fifth, acquirors should ensure that they have available sufficient resources and personnel to coordinate and assist with the integration of the acquired firm following the closing for the transaction. While often underestimated, integration of an acquired firm following the close of a transaction is a significant factor in determining the overall success of the acquisition. Post-transaction integration often requires an investment of a significant amount of time and resources. Transition of client accounts, fee billing arrangements, operational workflows, restructuring of employee teams, and training new employees on new policies and practices, and other factors can often lead to the integration process taking anywhere from twelve to eighteen months after the closing of the purchase transaction.

In summary, an RIA seeking to grow through acquisition of another practice should ensure it is properly prepared to explore and consummate a purchase transaction. Taking the steps described above will significantly increase the likelihood of success when pursuing such a transaction.

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