Mergers and acquisitions might not be at peak levels when it comes to Registered Investment Advisers (RIAs), but there is still plenty of action going on - and a good opportunity to sell at a decent price.
However, this is not the guarantee it used to be, as the market has dictated that valuations for many RIAs have dropped.
It’s therefore more important than ever for sellers to do everything can to ensure that their RIA business is attractive to buyers.
There are a few strategies that can really have an impact on potential buyers and cause them to up their valuations when they make a bid.
To a large extent, it’s characteristics that drive value, not size. With that in mind, we have listed
the specific characteristics that sellers should focus on in the run-up to selling their business.
If there are two firms of a similar size looking for buyers, it will usually be the firm with the biggest net margin that will appear more attractive. In fact, this will often be the case if one firm is bigger.
The multiplier effect that a firm with a larger net profit margin could bring to the table tends to have a big impact on valuations. If it’s possible to cut running costs in the build-up to a sale, this might be worth your while.
Earnings growth is similarly important, because buyers want a business’ cash flow to be sustainable.
Lifestyle Firms vs Professionalized Firms
The major difference between lifestyle firms and professionalized firms is that the former tends to attract clients that are tied directly to the principal. This is far from ideal for potential buyers and can have a negative effect on valuation. Many lifestyle firms tend to have a large proportion of older clients too, and these are considered as declining asset.
Professionalized firms that structure their business more strategically can institutionalize their client base more easily and this is far more comforting to potential buyers.
Those who structure their business like a professionalized RIA can therefore attract a much larger offer from buyers.
It’s advisable to institutionalize asset management using standardized investment models that are scalable. This scalable model is considered more sustainable by buyers and as a result the business is considered less of a risk. Customized investment solutions are seen as more risky and could put off buyers altogether.
Consider your Buyer Profile
Buyers can often be characterized based on the type of firm they’re looking for. The main characterizations are:
- Strategic: typically interested in larger firms;
- Financial: looking for potential to grow;
- Peer to peer: attracted to cultural fit as well as financial gain.
If you can recognize the profile of the seller, you can get a good idea about their desire for your company and price the company accordingly.
Ideally, these strategies will be on the back of a principal’s mind way before they decide to sell up. Those who always run their business as if they were trying to sell it are more likely to be successful.
At Succession Link, we specialize in helping business owners find the perfect match for buying or selling a business. Click the link to find out more about our business model.