M&A for RIA firms is alive and robustly healthy, says investment banker Harman "Jet" Wales, managing partner at Moss Adams Capital LLC in Seattle. Although buyers are now focusing on smaller firms since many of the large firms have already done their deals, "2007 was a peak year for sellers," Wales adds.
While the 2008 run rate for deals is lower, so far, it's still brisk, Wales notes, adding that the volatility in the economy and markets hasn't affected valuations of RIA firms. However, some of the risk has shifted to the seller, especially for smaller firms being acquired by other RIAs. There, Wales says, he sees "payout [terms are] shifting one to two years further into the future."
One 2007 deal that demonstrates the desire of acquirers to buy firms on the smaller end of the AUM scale took place last fall when Lela Jahn sold the RIA firm that she founded in 1987, San Francisco-based Jahn Investment Advisors, to StanCorp Investment Advisers.
By design, most of Jahn's clients are women. Her firm has $150 million in AUM, with 66 clients--each with an average of "roughly $2.2 million in assets," she notes. "We had not been planning to sell--that was not our business plan until one of our peers took us out to lunch and said, 'You know, if you're thinking about selling I would like to explore buying your practice.'" That was around two-and-a-half years ago, and after that encounter, Jahn decided to explore a sale using the Schwab Transitions Web site's listing service. Similar to an online dating service, the site provides a place where buyers and sellers can put up their information anonymously; if a buyer is interested he or she contacts the seller, and then the parties may choose to begin an M&A courtship. As of July 1, Schwab's service listed information on 245 buyers and 44 sellers. "When we threw our hat in the ring we were surprised at how much response we got, and that's what encouraged us to go forward," Jahn notes.
It was then that Jahn hired Jet Wales, whom she calls "a critical part of our whole process" as her investment banker. Wales helped Jahn and her husband Don Bayer, who had joined the firm as an employee, to "weed out" buyers they were not interested in, and "work out what our priorities were. One of them," Jahn reveals candidly, "was money."
Wales helped Jahn and Bayer define what kind of buyer they did want, as well as their personal and business goals for the sale. "The ideal buyer will satisfy both," the personal and business desires of the seller, Wales asserts.
Almost a year after the sale--the transition period will end Sept. 30--things seem to have gone smoothly, according to Jahn. "StanCorp has been wise enough to retain me for the transition year until the clients had an opportunity to understand the new quarterly reports and bond with the new advisor," Laura Chernova. Jahn is particularly proud of the fact that she has retained "99 percent" of the clients from her former firm. How? "I meet every quarter with clients," Jahn explains, which gives her "an opportunity to communicate with clients what's going on. So, even before we signed any documents, I was giving them a heads-up that we were looking around for a partner that would enhance the business as far as research and technology were concerned."
After the transition Jahn and Bayer plan to travel, and she will also take on a different challenge: A post as adjunct professor at the University of Wisconsin Stevens Point, (Jahn's alma mater) College of Professional Studies, Division of Business and Economics and the School of Education.
Knowing what she knows now, there is one thing Jahn says she would do differently. During the two years when she was looking for the right buyer, she closed her firm to new clients. Now her advice to other RIA owners contemplating a sale would be: "Keep growing it!" She also advises sellers to hire a team: investment banker, attorney and CPA--but especially the investment banker--and don't balk at the expense. Wales, she points out, was "extremely valuable in negotiating the final sale agreement" and guiding her around the potential shoals all along the way.
--Kathleen M. McBride
