Thinking of acquiring another RIA to complement your own firm? That could be a wise decision. Growth through acquisition can be a great way to scale, increase revenues, and offer more services to your clients. And it can often be a much faster route than organic growth.
Not all acquisitions go as planned, though. In Pershing’s most recent Real Deals report, the firm found that mergers and acquisitions between RIAs is on the rise. However, some of those transactions aren’t resulting in the desired level of benefits.
According to the report, nearly 71 percent of acquiring firms said they went into the transaction to increase revenue growth. Only two-thirds of respondents though said that they experienced a satisfactory increase in revenue. Similarly, 59 percent hoped to increase their asset base, but only 51 percent saw an increase.
While these gaps aren’t huge, they’re significant enough to notice. Mergers and acquisitions are challenging, even when they’re successful. Before commencing a transaction, you want to be sure that you have a plan and that you’re making the right decision.
In the report, Pershing lays out suggestions for how acquiring firms can reach an informed decision about whether to acquire an RIA. Here are three of the most important steps:
Identify a problem.
Far too many acquirers act on opportunity, not need. They hear about an opportunity to acquire a firm and they act on it, without really thinking about whether the transaction servers a purpose.
Instead, Pershing suggests starting from a well-defined need. Is there a hole in your client offerings? Is there a market you need to tap? Do you need to scale up to compete in your area? What about succession? Do you need to find new leadership?
When you start with a defined need, you can be sure that you target firms that actually fill a useful role in your own firm. To use the “square peg in a round hole” analogy, you’ll avoid that problem because you’ll know that you have a round hole to fill. Thus, you’ll only look for round pegs.
Define your goals.
Once you’ve identified your need, think about how you want to resolve the issue. If scale is your problem, consider how big you really want your firm to be. If you’re missing an important client offering, think about what kind of service provider you want to be.
You can’t get anywhere without a destination in mind, so it’s important to think about your goals. This is especially true if there are multiple owners or leaders involved. You want to be sure that everyone has the same objectives before you start on a transaction.
Consider every option.
An acquisition may be exciting, but is it really the best option for you? You won’t know unless you consider all the options. The biggest alternative to a transaction is usually organic growth. Consider whether building your own team or scaling up organically may be more suitable for your firm than acquiring another one.
If you’re lacking an essential service or expertise, consider whether a strategic partnership may suit your firm better.
If you don’t consider alternatives, there’s no way for you to know that an acquisition is the best action. Once you’ve listed all your alternatives, gather your partners and other stakeholders for analysis and discussion. If you come out of that with acquisition as the best path, then you can head into the acquisition process with confidence.