Published May 15, 2019
It’s well reported that M&A in the wealth management space in 2018 (and extending into Q2 2019) has been robust across all channels and most notably among independent advisors at IBDs and RIAs (of all sizes). Deal valuations are approaching pre-2008 levels of 6 – 8X EBITDA, and appear to be lingering at the higher end of the range as discussed with my peers in the industry. There’s a multi-year theme playing out for advisors where headwinds to organic growth and the lack of scale and operational leverage have not only become critical success factors (where size matters) but ever more difficult to achieve. Enter the issues that the regulatory landscape is becoming more complex and uncertain, advisors are becoming less differentiated (and challenged to defend their fees) and that the industry is literally in a succession planning crisis! Clearly, there’s more at play than noted here, but these are nonetheless major themes playing out. That said, we can all agree that the race to scale is on, the climate is favorable, and the opportunities are many.
A Deal is More than Economics
So, how does an advisor looking to grow inorganically optimally position themselves to stake their claim in the current wave of opportunity? The first step is to understand that the first deal is always the hardest deal and that they progressively get easier with experience. Step two is to understand that there is infinitely much more at play than economics. The quantitative part (financing & valuation) is the easy part, if not the tip of the iceberg – that’s just math. The qualitative part, or the “softer side” of closing a deal, however, is infinitely more complex and difficult to navigate as it involves humans, where a dynamic path of the unexpected needs to be navigated with self-awareness and intuition. You simply cannot close a deal with a check without closing the emotional part of the sale. Enter behavioral finance!
Here are some practical thoughts buyers should consider when navigating the behavioral and emotional aspects of an advisory acquisition.
- Establish trust and integrity. Connecting mentally starts with the process of showing a great deal of respect, professional acknowledgment, and empathy. Following through on what you say and do is, of course, the definition of integrity. It’s critical for the buyer to understand what they can control and what they can’t. That said, what can’t be controlled, can certainly be influenced, but if trust is not captured from the start, the deal is already lost.
- Understand the seller’s personal goals in addition to their professional goals. What are they looking to accomplish and in what time frame? What are their plans after they sell? If it’s sitting on a beach or traveling the world, reinforce those images (with an umbrella and a Corona!). If they haven’t thought it through, seize the opportunity to help them develop that image. The buyer has to focus on enabling a higher purpose, one that takes the foundation of their life’s work to the next level and beyond. The seller needs to see that they are leaving their practice in capable, caring hands that will be great for clients for a myriad of reasons, including a new service capability, better technology and reporting, a client first culture, an enhanced unique experience, etc.
- Identify emotional triggers. One of the key principles in behavioral finance is that investors (buyers and sellers) are irrational. In M&A, that translates where “sellers” may have elements of not being rational since their emotions interfere with their judgment and decision making. In this context, the buyer’s focus should be on the seller’s state of mind. Deconstruct the seller into their biases to expose their highly-personal, decision-making process (which may very well be irrational especially in the face of uncertainty). What are they attaching importance to? Regardless of how obscure, delusional or illogical the seller may actually be, the seller needs that unequivocal sense that the buyer understands them. Detecting sensitivities and areas of overreaction and understanding what drives them is key. Using intuition to identify such emotional triggers can position the buyer at an advantage, where the buyer might pre-empt such emotions only to confirm and validate them in the mind of the seller. Sound like a Jedi mind trick or an emotional partnership? The buyer should look for opportunities to remind the seller that they understand what’s important to them and then continue to reaffirm along the way.
- Recognize the stages of the process. Understand this is the seller’s life’s work and that the emotional attachment they place on parting with their legacy is going to play out in stages. Like a bipolar business cycle, there will be peaks and troughs with occasional extremes (including delusions, fears, anxiety, and conversely, a sense of hope, reflection, and forward-minded optimism). Treat negativity as an objection and prevent it from compounding by reframing the conversation. Consider a SWOTs approach where you leverage your Strengths to seize on the Opportunity (buying the practice) by overcoming Weaknesses (seller’s objections) and eliminating Threats (outside competition).
- Look beyond the numbers. Price is a major factor, but it is not to be treated in a vacuum. It’s important to keep in mind that just because the economic offer will get the attention wanted, the seller could lose interest quickly if the businesses don’t structurally line up. I would recommend getting beyond the price discussion as early as possible so that the buyer can focus on the intangibles that can make or break a deal. Don’t haggle over a single multiple – a price of 7 vs. 8X EBITDA. Assume another seller will always be willing to offer the 8X if you don’t! Realistically, when you run the numbers, the additional cost is recouped in short order – like 3-6 months. Lastly, price is important as it provides emotional affirmation to the seller that their practice is perceived as being valuable, which plays to their ego.
The opportunity for advisors to seek out other practices to buy is as strong as ever. No doubt getting that first deal closed requires a fresh approach, starting with the buyer’s need to prioritize and painstakingly understand, the seller’s emotional dynamic. That said, controlling the narrative and framing the sale with a road map such that the seller is led through a door of “light and discovery” can only bring positive results. Most who are successful are open to new ways of thinking. Those who are not can be influenced if you take the time to know them and align with their mental rhythm.
Check back for Part 2, coming soon.