RIA Valuation Insights Whitepaper: Succession Planning for Investment Management Firms
For this week’s edition of RIA Valuation Insights, we revisit our whitepaper, “Succession Planning for Investment Management Firms.” The updated whitepaper complements next week’s webinar, “Succession Planning for RIAs: Transition with Confidence,” with RIA team leader and CEO of Mercer Capital, Matt Crow and RIA senior team member and Senior Vice President, Brooks Hamner.
Succession planning has been an area of increasing focus in the RIA industry, particularly given what many are calling a looming succession crisis. The demographics suggest that increased attention to succession planning is well warranted: a majority of RIAs are still led by their founders, and only about a quarter of them have non-founding shareholders. Yet when RIA principals were asked to rank their firm’s top strategic initiatives, succession planning lagged far behind strategic initiatives with a more immediate benefits like new client and staff growth. Fortunately, there are many viable options for RIA principals looking to exit the business.
- Internal transition to the next generation of firm leadership. One way to maintain independence is by transitioning ownership internally to key staff members. This process often takes a substantial amount of time and financing as it’s unlikely that the next generation is able or willing to assume 100% ownership in a matter of months without external financing.
- Debt financing. One way to finance the buyout of retiring shareholders is through debt financing. There is a growing number of specialty lenders who are accustomed to working with RIAs.
- Sale to a consolidator or roll-up firm. Consolidators and roll-up firms provide capital to fund ownership transitions, back office support, and differing levels of autonomy for remaining principals. While there is a relatively small number of consolidators, their share of sector deal making has increased dramatically in recent years.
- Sale to a private equity firm. Private equity can be used to buy out a retiring partner, but it is not typically a permanent solution. While PE firms provide upfront cash, remaining principals must sacrifice most of their control and potentially some of their ownership at closing.
- Minority financial investment. Minority financial investments can provide existing ownership with liquidity while allowing remaining shareholders to maintain control and an ongoing interest in the firm’s economics. Minority investors typically do not intrude on the firm’s operations as much as other options but will seek deal terms that adequately protect their interest in future cash flows.
- Sale to a strategic buyer. A strategic buyer is likely another RIA, but it could be any other financial institution hoping to realize certain efficiencies after the deal. This scenario often makes the most economic sense, but it does not afford the selling principals much control over what happens to their employees, clients, or the company’s identity.
In this whitepaper, we expand upon the options outlined above.
