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February 23, 2021 at 04:19 PM
What You Need to Know
- All metrics point to a continued robust M&A marketplace for advisory firms.
- Merge-ins are options that work for both buyers and sellers.
- Combining external and internal players can help transition and financing.
All metrics point to a very robust M&A marketplace primarily based on aging advisor demographics. However, the opportunity for active buyers may not materialize if RIA M&A market participants do not appreciate the delicate nuances of a practice sale and embrace more creativity around transaction structure to satiate discerning sellers.
Recently, we’ve witnessed a rapid proliferation of a new M&A transaction type that incorporates the benefits of an internal and external sale into one transaction: a “merge-in.” Merge-in transactions benefit buyers, sellers, and the bank partners by combining an internal advisor with an external acquirer to successfully consummate the sale of a practice.
Internal vs. External Buyers
Internal sales involve M&A transactions to junior advisors (commonly in age and participation in the capital structure) who are already part of the seller’s practice.
Internal sales benefit in several ways: increased continuity of client investment and service philosophy resulting in lower client attrition risk, greater seller familiarity with his or her successor, and an increased interest in maintaining the legacy (brand, culture, etc.) of the seller’s practice.
However, internal sales can hit a hurdle when sellers require cash at closing via bank financing: junior partners often lack personal creditworthiness or net worth to retain bank financing.
External sales entail an advisor — not previously associated with the seller’s practice — acquiring the practice from the seller. Intuitively, the external sale does not yield the same seller benefits as an internal sale.
