Maximizing the Value of Your RIA Practice: How to Find the Best RIA to Sell To

Maximizing the Value of Your RIA Practice: How to Find the Best RIA to Sell To

Chances are you did not wake up one morning and decide to sell your RIA to the highest bidder. There is a good chance you have been thinking about selling your firm for several years. And the sales process has given you plenty of time to consider selling your firm to the right buyer for you, your clients, and your employees.

When you’re ready to consider selling your RIA, here are the top questions to ask yourself:

  1. What is my primary motivation for selling the RIA?
  2. Is it my intent to sell, retire, travel, and play more golf?
  3. Is my intent to stay active and help the buyer continue grow our newly-combined firm?
  4. Do I feel a need to be part of a bigger firm so that we are more competitive when we compete for high-net-worth individuals and ultra-high-net-worth clients?
  5. Am I looking to cut back on my day-to-day activities in the practice?
  6. Is it a combination of all of these questions?

Needless to say, the motive behind the sale is an important consideration that will have a major impact on the negotiations and the transition to new ownership. So, how do you determine who is the best buyer to minimize your risk of selecting the wrong buyer?

This is a lot like investors hiring the best financial advisors: They have to ask the right questions, know good answers from bad ones, and require documentation for the information that matters. 

How Do You Make Sure You Share the Same Vision?

It is reasonable to assume the firm that the buyer wants to accelerate the growth of your business. That is good for the buyer, but it may not be suitable for you, your clients, or your employees who are offered the opportunity to stay on. You want to be sure you and the buyer share the same vision for the future of the combined firm. This increases the odds your clients and employees remain with the buyer.

Therefore, first, you want to interview the buyer’s principals and advisors. In particular, professionals who have spent several years at that firm. Second, review their marketing materials—starting with their website and Google name searches for the firm and the professionals who work there. 

Third, ask for several references you can talk to (a combination of newer and longer-term clients is preferred). However, keep in mind that no one will knowingly provide a bad reference. 

What About the Financial Services That Are Provided by the Buyer?

How do the financial services of the buyer match up with the services that you have been providing to your clients? Planning, investment, insurance, tax, and legal—or some combination of these services—may need to be provided. Some of these service categories may not apply to your firm, but the closer the match, the easier the transition. 

Pay close attention to the buyer’s current investment services, as well: Are they active stock pickers or passive ETF investors? What about their current asset allocation? How much equity exposure do they recommend for their moderate-risk clients? Do they manage the assets themselves or outsource the work to an OCIO, TAMP, or another type of third party?

Who Will Be the Custodian for Your RIA Clients’ Assets?

Assuming the buyer is not a broker-dealer, there will be one or more custodians who have physical possession of your client’s assets. This makes it important to ask about deal structures: Who is their preferred custodian, and how does that impact your clients? Also, will they be required to make a change (and if so, how quickly)?

What About Different Fee Schedules and Fee Arrangements?

Let’s assume the buyer’s fee schedule is 25 to 50 basis points higher than your fee schedule. What happens to the fees of your current clients? Is there a gradual increase over a period of time, or is it more immediate? How does this impact the compensation disclosures in their ADV?

What if the Buyer’s Minimum Asset Requirement Is Higher Than Yours?

It stands to reason that advisory firms with more substantial AUMs will also have higher minimum asset requirements. Sometimes this is a hard minimum (non-negotiable), and other times it is a soft minimum (negotiable). However, the soft minimum may only apply to clients with multiple accounts, some larger than others.

This brings up yet another question: What happens to your clients who do not meet the buyer’s minimum(s)?

How Does the Buyer’s Reporting Compare to Your Reports?

Your clients receive monthly statements from the custodian or broker/dealer. There is a good chance that they are also receiving performance and market environment reports. However, what happens to your current reporting when the new buyer takes over?

Why Convert More of Your Revenue to Recurring Fees?

You already know a buyer will pay a much higher multiple for recurring revenue streams. Meanwhile, a buyer will pay a much lower multiple for transactional revenues (especially when a financial product has to be sold to produce the revenue). 

As you prepare your firm for sale, it pays to convert as much of your revenue to recurring fees as possible. These are usually asset-based fees, but they can also be fixed fees and subscription fees.

How Do You Select the Right Team To Advise You?

You will need the right team advising you to maximize the value of the sale of your business. The members of the team can include:

  • A mergers and acquisition specialist
  • An attorney to review legal documents
  • A CPA to help minimize taxes
  • An appraiser to determine the value of the business

The ideal members of this team will have experience in the financial service industry.

Who Owns the Client Relationships?

Is it reasonable to assume your firm owns all of the client relationships? Or, is it possible that the financial advisors who work at the firm own the clients—and can take them with them if they choose to leave? This would make the retention of financial advisors of the utmost importance. 

There is a greater possibility of an ownership issue if the financial advisors are independent contractors. As a result, you should obtain an agreement determining who owns the client relationships if you do not already have one.

What About the Client-Facing Financial Advisors?

It is important that all of your financial advisors agree to transition to the buyer’s firm. This should not be taken lightly. There is a good chance the advisor retention rate will impact the client retention rate. At the same time, the client retention rate will impact the sales price of your RIA.

The average age of your client-facing financial advisors may also be a factor. Some older financial advisors may use the sale of the business as a reason to move into part-time or full-time retirement.

Does Your RIA Have Weaknesses That Should Be Fixed Before the Merger Process?

Let’s assume an astute firm is interested in acquiring your RIA. Their due diligence team will be looking for any weaknesses that reduce your sales price—or could cause clients or staff to leave as a result of the sale of the business.

Any identifiable weaknesses should be corrected before you begin the sale negotiations. Succession plans must take a back seat.

How Can You Improve the Value of Your Brand?

There is a 50/50 chance the buyer will let you retain your current brand (in particular, if you have exceptional brand awareness in your community): The seller and buyer both win when the seller is a local brand name. The fastest, most economical way to build your brand in preparation for a sale is to grow your visibility on the Internet. 

And, the more visible you are on the Internet, the more investors will visit your website. This visibility and traffic will enhance the value of your firm. 

What Is Your Due Diligence Process When You Sell Your RIAs?

Rule number one of due diligence goes as the old saying does, “You can’t ask too many questions:” You want to be as thorough as possible to minimize surprises caused by a failure to determine the quality of the buyer.

Rule number two is “Get documentation for as many responses as possible.” If it is important to ask the question, it is just as important to obtain documentation for the responses.

Rule number three is “Validate as many of the buyers’ responses as possible.” Trust what you see, not what you hear.

How To Transfer More Clients to the Buyer?

One of the major risks when you sell an RIA is that a significant percentage of your clients could leave after the purchase is complete. To minimize this risk, you want to prepare your clients for the sale, making sure that your buyer is open to being actively involved as you communicate with your clients. Both of you may need to reassure them about the consistency of their portfolio management.

The ideal buyer will produce several important benefits for your clients in the form of improved services with no material increase in fees. The more compatible your firms are with one another, the smoother the transition is likely to be for everyone: Owners, clients, employees, and advisors.
If you’re considering selling your RIA in the near future, talk with the ViaWealth, LLC team to see if we might be a good fit for your specific needs.

Considerations for Selling RIA eBook

More about the author: Reid Larson

Reid is the Managing Member and Founder of ViaWealth LLC.

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