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As we discussed in our M&A Buyer and Seller Vibes Update, Deal Structures in the Registered Investment Advisor (RIA) M&A space started shifting in 2022, moving away from the cash-heavy deals that were prevalent in the years following the pandemic. This shift has continued and is expected to persist into 2025 as the industry adjusts to higher capital costs and embraces new strategies to accommodate both buyer and seller needs.
In this blog post, we want to dig deeper into The Deal.
There are three dominant Deal Types:
Buyers often use terms like “aggregators” and “integrators” to describe their acquisition models. Aggregators are focused on building large platforms and may not be deeply involved in the seller's day-to-day operations. They look for firms with proven operational capabilities and unique aspects to invest in. Integrators focus on delivering wealth management services and may require more integration into the buyer’s existing business model.
Full Acquisition and Minority Acquisition models can offer varying degrees of control to the seller. The specifics are outlined in the details of each deal structure. Rather than focusing on control, sellers should consider what they are seeking from the transaction and let that guide their choice of model.
Deal structuring considerations include an asset vs. stock sale, down payments (cash), equity, earnouts or earn-more incentives (non-cash) and more.
The first consideration is an asset versus a stock sale. In an asset sale, the buyer purchases specific assets of the seller. This can include things like client data, trademarks, equipment or even office furniture. In a stock sale, the buyer purchases the stock or ownership of the seller's company and the business may continue on as it was before, depending on the details of the deal.
Deals can still be cash-heavy, but the cash is often paid out over time, typically one to three years, and may come with contingents. While it still remains a significant driver, the proportion of cash to the non-cash components of a deal has decreased in recent years. It is worth noting, sellers nearing retirement often prefer cash deals (something to consider if that is a part of your target acquisition profile).
Equity can be used as either voting or non-voting shares and becomes a stronger component of the deal when the seller stays on with the combined firm. This aligns incentives with overall firm performance.
Contingent Payments include earnouts, long-term variable notes, or any consideration dependent on financial results beyond one year. This is where retention considerations come in, tying incentives to clients transitioning to the new firm. These payments involve risk for the seller, so they may demand a premium.
A Shared Risk/Shared Reward aims to balance cash deployment and equity to create a shared upside and risk framework. It encourages both parties to focus on the best match, which can result in higher client transition and asset retention rates.
Some additional elements to deal structures to keep in mind:
It is best practice for both Buyers and Sellers to consult with a tax professional, as deal structures can have significant tax implications. Below are high-level guidelines.
For Sellers, asset sales generally allow the seller to pay taxes on the difference between their basis in the assets and the price paid by the buyer. The sale of capital assets usually results in long-term capital gains tax treatment for the majority of the purchase price. Revenue-sharing arrangements typically result in ordinary income tax rates for the seller on the sale proceeds, so it is best practice to weigh the benefits of revenue sharing agreements that may result in ordinary income when long term capital gains treatment could be an option.
For Buyers, in an asset-based transaction, they typically are able to write off the entire purchase price over time. In a stock purchase, the buyer is merely acquiring basis in their investment as with a stock purchase. Buyers tend to prefer an asset-based transaction for liability reasons, as purchasing assets reduces the possibility of becoming entangled in the seller’s undisclosed or unknown liabilities.