Next week, during the inaugural RIA Practice Management Insights conference, we will set aside some time to answer your questions about succession planning.  Roughly two-thirds of RIAs are still owned by their founders, and only a quarter of those have non-founding shareholders.  We won’t solve all the pieces to the succession planning puzzle in our session, but we’ll address succession planning strategies, and what works best under different circumstances.

We’ll cover some of these in more detail next week, but here’s a preview of our thinking about various succession planning (and exit) options.

Sale to a Strategic Buyer

In all likelihood, the strategic buyer is another RIA, but it could be any financial institution hoping to realize certain efficiencies after the deal.  They will typically pay top dollar for a controlling interest position with some form of earn-out designed to incentivize the selling owners to transition the business smoothly after closing.  This scenario sometimes makes the most economic sense, but it does not afford selling principals much control over what happens to their employees or to the company’s name.

Sale to a Consolidator or Roll-up Firm

These acquirers typically offer some combination of initial and contingent consideration to join their network of advisory firms.  The deals are usually debt-financed and typically structured with cash and stock upfront and an earn-out based on prospective earnings or cash flow.  Consolidators and roll-up firms usually don’t acquire or pay as much as strategic buyers, but they often allow the seller more autonomy over future operations.  While there are currently only a handful of consolidators, their share of sector deal making has increased dramatically in recent years.

Sale to a Financial Buyer 

This scenario typically involves a private equity firm paying all-cash for a controlling interest position.  PE firms will usually want the founder to stick around for a couple of years after the deal but expect him or her to exit the business before they flip it to a new owner.  Selling principals typically get more upfront from PE firms than consolidators but sacrifice most of their control and ownership at closing.

Patient (or Permanent) Capital

Most permanent capital investors are family offices, or investment firms backed by insurance companies, that make minority investments in RIAs either as a common equity stake or revenue share.  They typically allow the sellers to retain their independence and usually don’t interfere much with future operations.  While this option is not always as financially lucrative as the ones above, it is often an ideal path for owners seeking short term liquidity and continued involvement in this business.

Internal Transition to the Next Generation of Firm Leadership 

Another way to maintain independence is by transitioning ownership internally to key staff members.  This process often takes a lot of time and at least some seller-financing as it’s unlikely that the next generation is able or willing to assume 100% ownership in one transaction.  Bank and/or seller financing is often required, and the full transition can take 10-20 years depending on the size of the firm and interest transacted.  This option typically requires the most preparation and patience but allows the founding shareholders to handpick their successors and future leadership.

Combo Deal

Many sellers choose a combination of these options to achieve their desired level of liquidity and control.  Founding shareholders have different needs and capabilities at different stages of their life, so a patient capital infusion, for instance, may make more sense before ultimately selling to a strategic or financial buyer.  Proper succession planning needs to be tailored, and all these options should be considered.

If you’re a founding partner or selling principal, you have a lot of exit options, and it’s never too soon to start thinking about succession planning.  Let us know what questions you have at the conference next week.

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Only 1 WEEK until the RIA Practice Management Insights conference begins!

Mercer Capital has organized a virtual conference for RIAs that is focused entirely on operational issues – from staffing to branding to technology to culture – issues that are as easy to ignore as they are vital to success. The RIA Practice Management Insights conference will be a two half-day, virtual conference held on March 3 and 4.

Join us and speakers like Jim Grant, Peter Nesvold, Matt Sonnen, and Meg Carpenter, among others, at the RIA Practice Management Insights, a conference unlike any other in the industry.

Have you registered yet?