When RIA leaders approach the M&A deal table, they sometimes balk at upgrading their firm’s technology.
The tech-skeptic argument usually goes like this: “I’m going to retire in a few years. In order to get the best valuation at the deal table, I need a strong balance sheet. It doesn’t make sense to make big tech investments right now.”
To that, I say: “Would you sell your house without cleaning it up first?”
It’s not a perfect analogy, but like selling a home, there is a difference between what a business is worth and what you can get for it. Advisor Growth Strategies found that the median RIA is being sold for just shy of 10 times EBITDA, but this valuation is not a guarantee. RIAs are not likely to command that kind of multiple just by showing up. Advisor Growth Strategies’ research found that buyers will bid 25% higher on a firm that is an “ideal” fit than one that only checks some of the boxes. And a quarter of buyers declined to bid outright on firms with greater than $1 billion in managed assets.
There is a difference between what a business is worth and what you can get for it.
Invest For A Higher Valuation
This is to say that while tech skeptics may argue otherwise, they are mistaken – RIAs must invest in technology to achieve the greatest valuation. Yet, RIAs often struggle to connect the dots between a tech investment and creating that “ideal” offering at the deal table. To bridge this gap, RIAs have to understand that acquirers evaluate firms not just on a snapshot of how they look now, but how they might perform in the near future. Buyers want to see evidence of proven, measurable and repeatable processes that drive organic growth and client satisfaction.
“But I have that,” I often hear. Great! Can you show that at the deal table?
Buyers expect to see business intelligence in your CRM that can back up your claims and demonstrate your strongest growth channels. Imagine two firms with identical assets under management. One has a significant portion of its book of business in decumulation. The other has courted healthy inflows of next-generation clients and can easily point to their centers of influence directly within their CRM. You can imagine which firm is likely to earn a higher multiple.
An Engine For Success(ion)
Stakeholders at the deal table need to understand that you have an engine for success. But they need to see an engine for succession, too. Your deal partners will look to see how much of your firm’s institutional knowledge is locked up in the heads of its principals or sequestered in manila folders covered in sticky notes. Ideally, your tools capture the full depth of your client relationships and the workflows that have contributed to your success so far.
If you packed your bags and left tomorrow, how quickly would the most junior advisor on your team be able to step up and serve your highest value clients – those with the longest relationships and the biggest drivers of success at your firm – without missing a beat?
Portability Of Data
The portability of data will also influence the valuation of your business. Even if you invest in one platform and your would-be acquirers are running on another, it will still benefit you if your business data exists in some standardized format. All things being equal, well-manicured data in a modern CRM will be more portable, post-M&A, than a legacy system, or a folder full of unorganized notes.
You want to demonstrate that you’re running your business on all cylinders.
It helps to look at this kind of tech investment as part of the whole M&A process of steps to create the most opportunities for everyone involved. You want to demonstrate that you’re running your business on all cylinders. It’s worth weighing the cost of a tech implementation against the doors that would open with a 25% higher valuation from a partner who can now clearly see you are their ideal fit. The alternative – doing nothing – undoubtedly saves a buck in the short term but may cost you the valuation you could have received.
Adrian Johnstone is the CEO and Co-Founder of Practifi.
