Mastering emotions and avoiding other landmines are keys to negotiating successful RIA transactions.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).
 

RIA succession arrangements are supposed to involve planning, not punching matches—but it doesn't always work out that way, says Fiduciary Network co-founder Mark Hurley.

He cites one case in which things turned ugly shortly after two founding advisors started to talk about selling their firm to their junior advisors. "Suddenly, out of nowhere, they all started screaming at each other," says Hurley, who had come to see if his firm could provide capital for the deal.

The firm's founders and successors began to push and shove each other and the meeting devolved into a physical altercation—leaving Hurley, fresh off knee surgery, scrambling clear.

That brawl, about five years ago, has been the only physical altercation in his work facilitating advisory firm mergers and acquisitions, Hurley says—but out-of-control emotions come with the territory.

Rage and fear are "very common," he says.

Why Deals Fail
To date, Fiduciary Network has made 17 total investments in advisor firms that, together, manage $22 billion in client assets, the firm claims. Yet the vast majority of transactions it handles fall through—often because of greed, naïveté, or emotional ineptitude of the planners involved on both sides of the deal.

These complications tank many otherwise healthy-looking deals, Hurley says, reducing the number of transactions that take place at a time when retiring advisors have pushed the need for successful M&A deals to an all-time high.

Hurley and his coauthors have collected both observations and success tips in a hefty new report on the strange underbelly of the M&A market for financial advisory firms. Titled "Understanding, Managing and Capitalizing on the Psychology of Buying or Selling a Wealth Manager," the report offers guidance to any advisor trying to ink a deal.

Success Tips
Among the recommendations in the report:

• Prepare way ahead of time. Founders who want to sell their firms need to start preparing as many as eight years ahead of time to ensure their successors are ready to buy.
• Stop being greedy. Most "avaricious" owners won't sell their firms, the report notes. Pre-deal due diligence often unmasks "rapacious" founders who have hoarded most of a firm's profits for themselves for years, underpaid their successors, and made promises they can't keep to colleagues that they will be able to buy the firms one day.
• Don't overestimate your firm's value. Sellers typically overvalue their firms, and may insist upon absurd conditions—veto power over future technology purchases, for instance, or ongoing payment for personal expenses historically billed to the company.
• Don't undercount successor advisors' power. Legal ownership of a firm counts for very little when it comes to selling a firm. Next-generation successor advisors can (and often will) hold up deals until their demands are met. If they aren't relatively content and strapped to the firm with ironclad contracts, the firm isn't worth much, Hurley says.
• Prepare for “delusional” advisors. Most sellers are unnerved at the prospect of negotiating with successors or minority owners—for good reason. In truth, many minority owners are often "delusional" and start negotiations believing they deserve to own the firm, even when they lack the resources to pay for it.
• Eliminate caste systems. Firms with two classes of workers—employees who are subject to compliance rules and policies and founders who are subject to none—will be unattractive to buyers. In attractive firms, everyone in the firm is subject to the same standards.
• Prepare for constant stress. Anyone contemplating selling a firm should be ready for round-the-clock feelings of uncertainty, discomfort, and fatigue "that can lead to extremely odd behavior."
• Brace for emotional toll. Founding advisors say they want to sell their firms, but fail to appreciate the enormous emotional hit they'll take from both the process and the culmination of a deal. They need to understand the degree to which their firms have become part of their identities. So be sure you want to sell: Many founders begin to drag their feet as the deal process unfolds, sometimes by offering ridiculous-sounding reasons. (One choice example from the report: "God will not tell me to sign the documents.")
• Don't be small-minded. Out of peevishness, obstreperousness, or sheer irrationality, sellers will often try to sabotage deals, or succeed in doing so, at the last minute, by demanding all manner of exotic and strange conditions from a buyer, such as insisting a buyer not have access to a $20 Mr. Coffee machine or haggling over the location of a parking spot.
• Educate yourself. Learn about the M&A process in advance, the report suggests. Recognizing that they do not know what they are doing when it comes to M&A, sellers often become "terrified of doing something stupid."
• Don't be afraid to tell clients. "Contrary to what many owners proclaim, deep down many are unsure of just how robust their relationships with their clients really are," the report notes. But while sellers may be hesitant, clients generally will be receptive to the news—because they may have wondered about the firm's future themselves.

About that brawl, by the way: It turned out there were "years of pent-up anger and accumulated scar tissue between the generations at the firm," the report notes—and "news of a potential transaction was the spark that triggered an explosion."

Fiduciary Network did not complete the deal in that case, Hurley says: "It was radioactive."

—Ann Marsh