The state of mergers and acquisitions

Peter Mallouk is President and CEO of Creative Planning, LLC. and its affiliates. Creative Planning provides comprehensive wealth management services to its clients. These offerings include investment management, financial planning, charitable planning, pension consulting, tax services and estate planning services. Creative Planning manages or advises more than $225 billion in assets across all 50 states and 65 countries, as of December 30, 2021.


Russ Alan Prince: Your company has had a wave of acquisitions over the past few years and is growing at such a rapid pace. Give us your perspective on the state of the M&A market.


Pierre Mallouk: We have seen massive consolidation in the industry over the past few years until recently mergers and acquisitions were on track to pick up every year. We saw mergers and acquisitions peak in the fourth quarter of 2021 when markets were strong, but after going through a pandemic and a series of government shutdowns, I think a lot of people started to realize how quickly their businesses could take a turning.

On top of all this, the typical advisor is older, the market is becoming more competitive, and investors want companies with strong technology, compliance, and services. This is all normal, but when you see it all happening at once, it creates quite a tense environment. Since the beginning of the year, mergers and acquisitions have slowed considerably, but we still see these normal trends at work. Internal succession planning has become more difficult, and advisors know they may need help to compete in this new era of wealth management.


Prince: What types of buyers are there and how does a seller choose the right one? What are you looking for as a buyer?


Mallouk: I always advise sellers to ask themselves three things before choosing a buyer.

First, you need to determine what works best for your customers. If your clients like hedge funds, for example, the buyer should be a company that includes that in their core offering. When selling, it is imperative to find a place that will provide customers with what they came to you for in the first place. Think about the customer and their expectations and ask yourself this question: will this sale allow me to offer my customers what they expect from us and hopefully more?

Second, think about what’s best for your team. Obviously, you want to provide your advisors with job security and make sure they feel like they have a role to play in the new firm, but it’s also important to think about finding a successor who can offer your employees the best development opportunities. When looking at a potential buyer, make sure you ask yourself if it is a business that is growing steadily and has natural room for growth for your employees.

Finally, it is important to think about what is best for you in the future. Do you want your brand to stay the same or are you happy to integrate it completely? Are you looking for cash? How long do you expect to work until retirement? Some companies will allow you to maintain your brand image and get cash without any onboarding, while others will require full onboarding – their brand is your brand and their offer is your offer. Answering these questions will help you find a business that will best suit your personal goals.


Prince: What is driving valuations and what trends are you seeing?


Mallouk: There are so many factors to consider when determining the value of a business. Even if two companies have the same assets, revenues or profits, it does not mean that they will have similar valuations. If one business grows and adds new customers and the other loses customers, it stands to reason that the former will be worth more in the long run. Additionally, a business with an average customer age of 40 will be worth more than a business with an average customer age of 80, and businesses with high turnover rates will be worth less than those with have strong retention.

Valuation is ultimately determined by three key factors: what the customer base looks like, whether money is flowing in or out of the business, and whether the business is on track to grow. The qualifications, background and age of those involved are obviously also important factors, but actual earnings play a much smaller role in determining the value of a business than you might imagine.

Given the current consolidation trend, which I predict will continue for some time, the market is becoming increasingly competitive. Similar to what is happening in the CPA landscape right now, I predict we will see several large companies, many strong regional companies, and thousands of smaller companies. These small businesses are going to have to specialize in some way to stand out – whether it’s offering a low-cost option, offering a premium service, or specializing in a certain type of practice, that’s where I see the RIA industry heading for the next 10-20 years.


Russ Alan Prince is the executive director of Private heritage magazine and content director for High Net Worth Genie. He consults family offices, quick-and-rich entrepreneurs and selected professionals.

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