Key Takeaways
An outside investment can support employee ownership and succession, provided the transaction addresses how new partners acquire equity and participate in future value.
Founders, employees, and investors may own interests with different economics. Valuation, distributions, governance, and liquidity all deserve attention before closing.
A successful partnership needs a workable plan for the next ownership transition as well as the current one.
RIA owners sometimes frame succession as a choice between selling to an outside buyer and transitioning ownership to employees. An external investment can bring both groups onto the same cap table. Whether that arrangement works depends on what each group is buying, selling, and expecting.
This week’s announcement involving Accelerated Wealth Partners and Pallas Capital Advisors offers a timely example. AWP agreed to invest in Pallas, which oversees approximately $5 billion in client assets. According to the November 3rd announcement, the proposed partnership will provide growth capital and support for organic growth and acquisitions, while five Pallas leaders will become equity partners. The founders and partners will continue leading the firm. Closing is expected later this year, subject to customary conditions.
The announcement does not disclose valuation, ownership percentages, or how the employee interests will be funded. We therefore cannot assess the economics of this particular transaction. But it raises a useful question for other RIA owners: can outside capital make internal succession more achievable?
Start With Where the Money Goes
An investor’s check can serve several purposes. It can buy shares from existing owners, fund new shares issued by the company, or combine the two. Those uses produce different outcomes.
Money paid to selling shareholders provides liquidity to those shareholders. Money invested in newly issued equity provides capital to the business and dilutes existing owners. Neither necessarily finances an employee’s purchase.
That distinction matters when a transaction is described as funding growth, providing founder liquidity, and supporting succession. Owners should understand how much money goes toward each objective and whether borrowing adds another claim on future cash flow.
A well-funded acquisition strategy may benefit the next generation, but it does not resolve how those employees become owners. That requires its own terms.
Employee Ownership Has to Be Affordable
As we discussed in Changing Drivers, successful RIAs can become difficult for their successors to afford. An external investor may help fund a transition, but a higher valuation can also increase the cost of admission.
The employee’s economics deserve the same scrutiny as the founder’s sale proceeds. What must the employee invest? Is financing available? Will distributions cover debt service? How much compensation remains available for living expenses and personal savings?
Consider an employee who borrows to acquire equity expecting regular distributions. If the business subsequently retains most of its earnings to fund acquisitions, the investment may appreciate while the employee struggles to make loan payments.
There is nothing inherently wrong with retaining earnings for growth. The problem is financing an ownership purchase around distributions that everyone has not agreed to support.
The Same Percentage Can Mean Different Things
An investor may negotiate preferred distributions, priority in a sale, or other protections that employee shareholders do not receive. Employees may hold equity in the operating RIA while the investor owns an interest in a holding company. Some awards may participate only in appreciation above a specified threshold.
Before comparing employee pricing with the investor’s price, examine the rights and obligations attached to each interest. Model proceeds under several outcomes, including a disappointing sale. A structure that looks attractive when value doubles may allocate losses very differently when growth falls short.
Ownership and Authority Need to Fit Together
Continuing to lead the firm can mean different things after an investment. Management might retain responsibility for client service and hiring while needing investor approval for acquisitions, borrowing, distributions, or changes in compensation.
Those arrangements may be entirely reasonable. They should also be understood by employees being invited into ownership.
An advisor buying equity to help shape the firm’s future should know which decisions come with that investment. A founder planning to reduce involvement should know who will assume responsibility and whether that person has the authority to do the job.
Outside capital can bring useful discipline and resources. It cannot substitute for developing leaders or agreeing on how decisions will be made when the owners disagree.
Plan for the Next Transaction
The new employee partner and the outside investor may have different investment horizons. An advisor might expect to hold equity for twenty years. An investor may expect a liquidity event much sooner.
As we noted in The Sponsor Clock, a subsequent recapitalization does not necessarily produce liquidity for every equity holder.
Employees should understand whether they can sell alongside the investor, whether they can be required to sell, and whether they may need to reinvest proceeds. Departure provisions matter as well: someone leaving before a transaction could receive a different price under the buy-sell agreement.
The firm should also consider employees who have not yet reached the ownership group. If each capital event raises the entry price without creating a practical route to ownership, today’s succession solution may leave the next generation facing the same financing problem.
Making Both Work
Outside investment and employee ownership can complement each other. Founders can reduce their financial exposure, employees can gain a meaningful stake, and the firm can obtain resources to pursue opportunities it could not fund on its own.
Getting there requires more than adding names to the ownership schedule. Each group needs a clear understanding of its investment, authority, and expected return. Before agreeing to terms, put the proposed ownership structure through a cash flow analysis and several exit scenarios. That work will say more about the prospects for a successful partnership than the headline valuation.
About Mercer Capital
Mercer Capital is a valuation and advisory firm organized by industry specialization. Our Investment Management Team provides valuation, transaction, litigation, and consulting services to asset managers, wealth managers, independent trust companies, broker-dealers, private equity firms, alternative managers, and related investment consultancies.