Why RIA buyers are seeking relatively young leadership — and vice versa

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• Key insight: Amid an M&A slowdown, private equity buyers are increasingly prioritizing RIAs with younger leadership to secure future organic growth and protect their own downstream exit strategies.

• What’s at stake: Aging founders who fail to develop next-generation talent or formal career paths risk suppressed valuations and fewer bids from highly selective acquirers. 

Amid signs of an M&A slowdown and buyers getting more picky about which registered investment advisory firms they acquire, younger leadership teams are getting more valuable.

The attributes of future growth capability, reliable succession plans and private equity investors’ ultimate need to turn over an asset they acquire explain why relatively youthful founders and executives in their 40s or early 50s are more attractive to buyers, according to experts. So RIAs led by younger founders or firms that have invested in creating tangible career paths and compensation structures proven to build a next-generation talent bench will reap more bidders offering higher valuations.

“I have definitely seen buyers shy away and/or offer less when there aren’t successor advisors at the firm,” said Carolyn Armitage, a veteran industry executive who is the founder of Wealth Management Consulting. “It is becoming much more difficult to hire and retain advisors that are at that high technical, high EQ [emotional intelligence] component, where they can really dialogue with clients and understand their issues.”

From the buyers’ perspective

In that environment, RIA sellers with youthful founders or at least younger members of their leadership “attract outsized interest” from potential buyers, said Brian Lauzon, a managing director with wealth management-focused investment bank Colchester Partners.

“When acquirers see an opportunity to partner with a young, growth-minded team, oftentimes they will bid aggressively to secure talented professionals,” he said in an email. “This is part of a broader trend of founders choosing to merge with larger organizations earlier in the lifecycle of their firm. They are motivated by the higher potential organic growth rates they believe are possible as part of a larger, well-resourced organization with broader capabilities. This is consistent with the trend of higher valuations being placed on firms with a track record of strong organic growth and a clear plan to continue generating future organic growth.”

Among private equity investors and RIA consolidators backed by them that comprise the majority of active buyers in industry M&A these days, the problem of possible successor advisors who leave the firm and usually take clients with them can also mess up the next transaction in their investment cycle, noted Jeffrey Czajka, a certified exit planning advisor who is the founder of training and consulting firm Advisor Growth Solutions.

“Everything has to work out right in every single deal for it to be a clean, attractive bundle to sell on the flipside,” Czajka said. “They’ve learned their lesson. You’re seeing that play out now, and it makes a ton of sense from their perspective.”

Getting started early pays off later

The RIA owners who eventually turn into the sellers to such investors ought to keep in mind that founders often “have a couple of misses before they find that right successor,” Armitage noted. She has seen founders on either side of a spectrum with next-generation talent, with some owners who are “more generous than perhaps they should be” with equity stakes and others who “hang on to their firm past their growth arc” to the point that they turn off potential buyers. 

Since creating a succession plan and putting it into motion typically takes five to 10 years, those younger owners can address those questions and lift administrative burdens at the same time.

“They’re decision points of, ‘Do I want to continue running the firm while I manage the clients, or do I want to let one of those two go?'” Armitage said. “I love to see advisors starting to think about succession planning as early as 40 or 45.”

For founders, those kinds of factors should place choices like whether to hire a paraplanner at around $80,000 a year today in a different context, according to Czajka. In the end, the continuity of service through a successor who is familiar to clients could help keep them on track toward their financial goals while simultaneously attracting more buyers to bid on the RIA, too.

“There’s a lot of education, awareness and understanding on the advisors’ parts as they’re approaching the very beginning of their runways,” he said. “Sometimes they don’t explore, what does that fully mean, adding that paraplanner to the team? It could be half a million dollars when they sell their practice.”