Success vs. Failure series: Why Some RIA Purchases Fail and Others Flourish
Part 2 of 2
Registered investment advisor (RIA) firms looking to grow often choose to purchase another firm. But this is rarely a straightforward process. All too often, we see investment advisory businesses rush into a deal only to regret it later. But the good news is there are 4 keys to success you can use to set yourself—and your RIA firm—up for a successful transition.
Here are our 4 keys to success when purchasing an investment advisory business:
1. Start with a Strategy
Having a strategy in place—before you begin seeking an RIA firm to purchase—keeps you from reactively responding to the next opportunity that comes your way. At the very least, your purchasing strategy should consider what constitutes a good fit for your firm, both financially and culturally.
In our experience, RIA firms who successfully join forces are compatible across these five areas:
- Investment philosophy
- Client demographics
- Business vision
2. Find Partners who Complement You
To accurately assess an RIA firm’s culture, you must take a close look at its partners (unless, of course, you are purchasing the firm only for its client base). Ideally, their business philosophy and personalities should complement yours. Finding this out requires ample due diligence on your part.
To start, consider talking to employees to get a feel for how the partners treat them as well as clients. Pay attention to how their representatives speak to clients on the phone and what they say about them behind their backs. Then, ask yourself the tough question: Will I truly enjoy working with these people?
3. Make Sure Your Business Practices are Aligned
The ideal alignment will depend on your strategy—that is, the reason you are purchasing an RIA firm. Are you looking to tap into a new client demographic, or do you wish to offer new products?
It’s also critical to look at how the RIA firm does business. Has it experienced regulatory issues? Has it been party to lawsuits, or is there pending litigation?
4. Develop an Implementation Plan
For a smooth transition to occur after the deal has been signed, a detailed implementation plan must be in place. This plan should be developed early in the process. At a minimum, it should lay out the terms of the transition, the role of the selling RIA firm’s owner, and the individual in charge of the transition.
Get Support for a Successful Transaction
If you’re considering purchasing or selling an RIA firm, Elevate CPA Group can help. As financial services industry specialists, we assist investment advisory businesses with everything from cash flow planning and projections to providing outsourced tax services.
Success vs. Failure Series: Why Some RIA Purchases Fail and Others Flourish
Part 1 of 2
The sale or purchase of a registered investment advisor (RIA) firm can be complicated. Some transactions seem like they were meant to be, while others fall apart in no time. So, what gives? Could there be a secret ingredient that makes selling or purchasing an RIA firm successful?
Although I wish it were that easy, the answer is no. The success or failure of an RIA firm purchase or sale depends on a number of factors. In this blog post series, based on a podcast we recently produced with leading SAAS business intelligence platform Truelytics. I’ll discuss the ins and outs of successful—and not-so-successful—deals involving investment advisory businesses.
In this post (Part 1), I’ll share pitfalls to avoid, so you can spot red flags before you get too far along in the process.
Here are 5 pitfalls to avoid when purchasing an RIA firm:
1. No Shared Vision
All too often, firms purchase another firm out of growth ambitions alone. Buying for this reason alone may not result in your desired outcome. For a deal to be successful, the two RIA firms involved must be compatible. This could mean they have commonalities in the type of clients they serve or products they offer, or it could mean they share similar business values. Most important, the two firms must have a shared vision for the future.
2. Lack of Open Communication Throughout the Process
Don’t be satisfied with the dog and pony show. If you’re entering into a deal with another RIA firm, it’s important to have tough conversations that get to the heart of each owner’s needs and expectations. Build trust before signing on the dotted line, so you can feel confident about what you’re getting into.
3. The Seller Won’t Let Go
If you’re purchasing an RIA firm and the owner insists on retaining control of certain aspects of the business, this could be a red flag. In order for the deal to work—for the two firms to be compatible—the seller needs to accept the buyer will be the one in charge.
4. Poor Client Communication.
One of the risks associated with purchasing an RIA firm is that its clients will leave after the deal goes through. To prevent this, it’s important to keep clients apprised of the transition. Sending an initial announcement followed by weekly updates is a good start. Be sure to give clients plenty of notice and support for any administrative changes. If the seller hasn’t or isn’t willing to keep clients in the loop, these clients are likely to feel ignored—and ready to jump ship.
5. Lack of Strategic Focus
It’s bad enough when one firm doesn’t know where it’s going. Adding another firm to the mix could make the situation even worse. This is why it’s critical to have a strategic meeting between both RIA firms early in the process. Make sure everyone is on the same page—and this goes for owners within the same firm, too. If agreeing on a focus becomes a challenge, it might be time to walk away.
Get Support for a Successful Transaction
If you’re considering purchasing or selling an RIA firm, Elevate CPA Group can help. As financial services industry specialists, we assist RIA firms with everything from cash flow planning and projections to providing outsourced tax services.
Do you know how much your RIA firm is worth? Many firm owners don’t think about their firm’s value every day, or even every year. Often, the question comes up only ahead of a sale or owner transition. But knowing your firm’s value is critical for more than these occasions. For starters, doing so can enable you to unlock powerful opportunities for growth. And this is where a fractional CFO who has expertise in business valuations can help.
What is a Fractional CFO?
Simply put, a fractional CFO is like having a virtual CFO for your business. Instead of keeping a full-time CFO on your payroll, you hire a CPA firm to provide outsourced CFO services. There are many reasons why an RIA firm might want to consider a fractional CFO. The one we’re focusing on today is the ability to track the valuation of your firm.
Why is it Important to Know the Value of Your Firm?
If you’re like most RIA firm owners, your firm is one of your largest assets. Now, what do you tell your clients about their largest assets? If you don’t know how much your firm is worth, you’re likely going against your own advice!
The thing is, it’s important to conduct a valuation of your firm at least once a year. Doing so is critical to understanding how you can increase your firm’s value and how your day-to-day decisions could affect it. A fractional CFO can easily provide you with a valuation as part of their CFO advisory services.
Allow me to explain…
Fractional CFO: Looking Beyond the Numbers
When it comes to your firm’s value, its revenue stream is only the tip of the iceberg. A fractional CFO will dig into your RIA firm’s revenue stream to determine exactly what makes up your revenue, such as the demographics of your client base. To give you a true value, a fractional CFO will normalize certain expenses and make sure they’re in line with market value. These could include officer compensation or even rent. With these insights, your fractional CFO can advise you on how to best grow your business and adjust your expenses or compensation if needed.
Rules of Thumb Matter
Your fractional CFO uses certain rules of thumb to help you better understand your firm’s value. This might involve walking you through your firm’s revenue per employee, average wage per employee, or discretionary earnings. With an understanding of your revenue stream, your fractional CFO can apply rules of thumb that account for the factors that make your firm uniquely valuable.
Outsourced CFO Services Grow Your Firm
By assessing your firm’s value each year and advising you on ways to increase it, a fractional CFO can be your secret weapon for growth. Comparing your firm’s value year over year can also help you see if you need to cut expenses or change the composition of your client roster. To explore how a fractional CFO could benefit your RIA firm, contact us today.