A few weeks ago, I spotted a red Alfa Romeo Duetto Spider and my mind immediately wandered to Dustin Hoffman driving a Duetto in the film that launched his career, The Graduate. Of all the small, four-cylinder convertible sports cars produced in the late 1960s, the Alfa Romeo stands out because of its prominence in the film. Fifty years after it was released, The Graduate is still relevant because the plot captures a common theme: life is full of moments of great accomplishment that summarily dissolve into concern over what follows.
Hoffman plays Ben Braddock, a newly minted college graduate returning home to Los Angeles. In spite of his successes thus far in life, Ben is disillusioned and nervous about the future. In the midst of his uncertainty, Ben is propositioned by the wife of his father’s business partner, Mrs. Robinson. The movie sorts out the ensuing affair between Ben and Mrs. Robinson, and Ben coming to terms with his romantic preference for the Robinsons’ daughter, Elaine. About the time he realizes he’s in love with Elaine, Ben finds out she’s getting married to someone else. He races to the church (the Alfa characteristically runs out of gas before he gets there), interrupts the wedding, and escapes with Elaine on a city bus. In the closing scene, Ben and Elaine sink into their seats and relish their victory, until satisfaction gives way to dread: now what?
Around the time I spotted the Duetto, we were working with a client who had received an unsolicited offer to acquire their wealth management firm from one of the many consolidators trying to build national scale in the RIA space. The offer was calibrated to get our client’s attention, with language that focused on “unlocking” value and projections of other-worldly financial returns from agreeing to the transaction. Irrational buyers with capacity don’t come along every day, so when a suitor presents themselves as “the one,” you better decide if they are genuine or not. If so, say “yes” before they change their mind. If the offer is too good to be true, take a pass. This case was more of the latter.
I know this particular consolidator has managed to convince numerous RIAs to join them over the years, so I can’t argue with their approach. Indeed, some of our client’s partners seemed more than intrigued by the overture, while others weren’t convinced. We were asked to review the offer from a dispassionate perspective and make recommendations to the partners about how to proceed.
This wasn’t the first time we’ve been asked to review an unsolicited offer to buy an asset management firm, and it surely won’t be the last. As such, we thought it would be worth taking a few blog posts to talk about unsolicited offers, how to approach them, evaluate them, and decide whether to pursue or reject them.
Over the course of the next few weeks, we’ll cover topics relevant to dealing with overtures from acquirers, including:
- Be mindful of your own psychology. Selling an asset management firm is an emotional episode disguised with numbers. Don’t confuse your own fears and desires with what may be the largest financial decision you’ll make in your career.
- Just because they want you doesn’t mean you have to want them back. There is a strategic approach to selling an investment management firm just as there is a strategic approach to acquiring one. Are they solving your problem or are you just solving theirs?
- Know what you are selling. You will be expected to give things up in exchange for the acquirer’s check – and some of the most significant items transacted aren’t listed in the purchase agreement.
- Be ready to value the offer. RIA transactions often include contingent consideration and terms that affect the cash equivalent proceeds of a deal. It is almost unheard of for an RIA acquirer to make payment, take the keys, and be done with the deal.
- Think about using an intermediary. A third party, compensated to represent you instead of the transaction, can be a powerful way to achieve the best outcome in any transaction.
Like young Ben Braddock, looking back on a successful life so far as a student but not knowing what adulthood will bring, partners in mature asset management firms can simultaneously feel both a sense of great accomplishment at what they’ve built and a great sense of discomfort at what lies ahead. An unsolicited offer is usually intriguing and sometimes presents a bona fide path forward, but it may also be a threat to everything you value.
We’ll be covering more on this next week, but feel free to give us a call if you’d like to talk sooner.