Selling Your RIA: Due Diligence & Reciprocal Due Diligence

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Selling Your RIA – Part 3: Due Diligence and Reciprocal Due Diligence

With the year after year record number of transactions involving the sale of Registered Investment Advisors (“RIA”) and the continuing consolidation of the industry, we continue our series “Selling Your RIA” with a look at the importance of both buyer and seller due diligence in determining valuation, deal terms and integration plan.

The Industry

RIA’s are a hot commodity and in great demand. With approximately 165 RIA M&A transactions through the third quarter 2021, nine months of 2021 has already surpassed 2020’s 159 transactions and the RIA M&A activity (by # of transactions) has increased in each of the last eight years (Devoe & Company).

Not only has the number of transactions increased in recent years but the makeup of the buyers has changed.  No longer is it the big wire houses acquiring the RIA “book” or transactions simply the mergers of RIAs to “bolt-on” additional business, what we now have are firms that are “Active Acquirers”, with sufficient deal capital, quality client service offerings, modern infrastructure, efficient operations, tested integration plans and yes attractive valuations to help attract and close deals with sellers. These firms are in the business (or it’s a large part of their business) of acquiring RIAs. These Active Acquirers are both public and private companies and are efficiently built to acquire RIAs and merge their practices so that the client and advisors are comfortable with the transaction and new combined firm.  The Active Acquirer does multiple transactions a year, have a M&A and transition team in place to guide the entire process from identifying target firms, preliminary offer, due diligence, negotiations, final offer, closing, and facilitate the integration of clients, personnel, compliance, operations, finance, and all aspects of the transition.

These Active Acquirers are built to move through and execute these transactions, but are you?

One of the key points in the sales process that we identified in part 1 of this series was the buyer’s due diligence and the seller’s reciprocal due diligence, we will explore that key area a little deeper below.

Due Diligence and Reciprocal Due Diligence

A potential buyer will do extensive due diligence on the seller. Proper pre-sale planning will demonstrate you are prepared for due diligence, are organized, run an efficient business and that you know your business, a buyer will see value in all of those.

Many buyers, especially the Active Acquirers have in house due diligence teams or relationship with accounting or other professional firms to outsource portions of their due diligence.  The due diligence request and process will span across your entire organization with a look back into your history and projections forward.  The due diligence process will include reviews of financial statements, client retention, client profiles and data, historic growth, source of growth, employee files, employee compensation, cost, real estate or lease cost and commitments, client reporting, operations, vendor contracts, employee benefits, compliance policies, regulatory matters, tax filings and other items across finance, technology, operations, advisor relationships, services provided etc.   As a seller, you need to be prepared for these requests producing accurate information that showcases your firm to the buyer’s due diligence team in a timely and efficient manner.  Timely, accurate and a complete response to due diligence reflects positively on your firm and even on your value.

Just as important is the seller’s due diligence on the buyer or “reciprocal due diligence”.  Your deal team will want to look at the buyer’s financials, it’s growth and understand their plan for the future and ability to execute on that plan.  A review of the buyer’s balance sheet, commitments, loans, and ownership structure is essential so you can see where your sale deal terms stand, do they have the capital support to pay you?  Will any installments or equity payments be subordinated to a lender or other classes of ownership? When are loans coming due, will they effect cash flow?  What is the culture and investment program of the buyer, will your personnel and clients integrate into their firm and be retained?  How will the infrastructure, technology, policies, and procedures effect the way you work and your client expectations? What will the integration be like, what will your commitment be to combine operations, services, and staff; will this take away from client service or achieving revenue goals? These and many other questions should be presented to a serious buyer and detailed support/data should be provided for your review to help you in making a decision.

Due Diligence

The due diligence request and process will span across your entire organization with a look back at the firm’s history and projections forward.

The buyer will use their due diligence to verify the representation made during the letter of intent negotiation and more importantly to determine the value or an offset in the value negotiated.  A buyer will look to see what integrates and if their pro forma of the combined business provides the buyer with value to justify the purchase price and risk.

The buyer’s due diligence will include reviews of:

  • Financial statements
  • Client retention
  • Client profiles and data
  • Historic/source of growth
  • Employee files
  • Compensation/benefits
  • Real estate/lease
  • Client reporting/operations
  • Investment platform
  • Vendor contracts
  • Compliance policies
  • Legal/regulatory matters
  • Tax filings
  • Other items across finance, technology, operations, advisor relationships, services provided
  • Etc.

The box above gives a list of some broad categories the buyer will review, this list is not all inclusive and the buyer will go deep into each category some highlights of the detail they will want to drill into may include:

Financial Statement Review: Income Statement
The buyer will review your current year, historical and “run rate” income statement.  Buyers will look for support of the revenue via client contracts, cash collections, terms (fee schedule, advance vs arrears billing, recurring vs. one time etc.).  The due diligence will dive deep into the expenses to determine base and bonus compensation, compensation models, fixed vs. variable cost, vendor commitments, etc.  A significant part of the buyer’s review of the income statement will be to proforma the combined business, concentrating on which revenues and expenses will integrate into the larger firm and what will be eliminated based on buyers’ integration plan and business model.

Financial Statement Review: Balance Sheet/Risk
A review of current vs. long term assets, as well as the liabilities and commitments of the business.  A buyer will review the current and historical accounts receivable to determine the days to collect on client fees and any slow payers or uncollectible accounts.  A review of the fixed asset schedule to determine age, useful life, and value of any assets to be acquired.  An analysis of liabilities and accounts payable schedules will provide insight into major expense or commitments and terms.  Historic equity rollforward will show capital commitment by owners, profit allocations and distributions expectations as well as earnings retained in the business.  A buyer can review for certain risk such as real estate lease commitments, revenue concentration (large clients, service, niche etc.) or valuation or estimates used in financial statement preparation.

Client Retention and Data
The buyer’s due diligence will review your client list and profile data, such a review would include # of clients, geographic location, industry or niche, services provided, lead advisor, # of clients/advisor, revenue concentration, tenure with firm, client turnover rate, etc.  The buyers review will consider the advisor and client expected retention rate and the revenue and cost to service in the new combined firm.

Employee Files, Compensation and Benefits
Due diligence review will include a review of employee tenure with the firm, licenses and expertise, client relationships, compensation and role of each employee, compensation and bonus models, employment agreements and commitments, benefit inventory and cost.  A review of these items will help the buyer proforma personnel cost of the new combined business, review for redundancy in staffing, compare compensation models and benefits packages to provide some insight into employee reaction, culture changes or symmetry and integration into the combined firm.

Investment Philosophy and Platform
Review of the investment platform, client asset allocations and historical performance, aum changes and net cash flows will give the buyer an understanding of the investment advisory business of the seller.  The buyer’s investment team will review philosophy and due diligence files as well as client profiles and investment policy statements to determine how the client list will be advised and serviced in the new combined firm.

Tax, Legal and Regulatory Matters and Filings
The buyer’s due diligence will review filings and policy manuals to determine if there is any risk, pending litigation or regulatory matters that may affect the client retention, advisor’s licenses, or firms’ reputation.  A review of the compliance and operational manuals will help in determining the integration of the two businesses and client onboarding.

Vendor Contracts, Software Licenses and Real Estate
Buyers will review for any long-term contracts or commitments.  Vendor review will provide the buyer with an understanding of outside services needed to support the business.  A review of the lease will determine location, terms, length of commitment, exit strategy, rights of first refusal and perhaps most important cost of space and whether lease is above or below market rents.  The buyer will use this data to proforma the business and cost and compare against their current vendor and lease terms for economies and synergies.

Operations, Technology, Compliance Etc.
A review of workflow, client onboarding, client reporting, billing systems, operation manuals, software, subscription services etc.  will give the buyer an understanding of how the operations work and are supported.  A review of client onboarding and reporting will help the buyer determine if their current systems/operation can support the services the seller’s clients have come to expect and any best practices to be incorporated into the combined firm.

While the list above may seem, a bit exhausting it is certainly not complete.  The buyer’s due diligence is going to have an impact on how they value (or justify the value) the seller’s firm.  Due diligence is an important step to proforma a combined firm and to develop an integration plan.  Sellers should work with the buyer to understand the due diligence request and the buyer’s interpretation of what they are reviewing, buyers do not always “get it right” and seller should be active in the due diligence, the proforma modeling, buyers’ assumptions, and the integration plan.

Reciprocal Due Diligence

Reciprocal due diligence will help the seller to verify how their firm, people and clients will integrate into the larger firm and the risk of the buyer not being able to satisfy the financial commitment of the deal terms. Understanding and verifying the firm culture, investment philosophy, strategy, capital structure, and balance sheet are all a part of the seller’s reciprocal due diligence. Your deal team should review, identify, and consider not only the benefits of the transaction but any risk or obligations of the parties to perform and satisfy the agreement.

The seller’s due diligence process will include reviews of:

  • Strategic plan and vision
  • Capital structure
  • Financial statements
  • Loans and terms
  • Investment philosophy
  • Compliance
  • Comp. structure/Benefits
  • Client reporting
  • Organization chart
  • Systems /Technology
  • Interview recent acquisitions
  • Integration plan
  • Etc.

The box above gives a list of some broad categories the seller may review, this list is not all inclusive and the seller will go deep into those categories which are most important to them based on meetings with the buyer and the seller’s goals.

A seller may dive deeper into some of these areas:

Strategic Plan and Vision
What is the buyers strategic plan and have they been able to show execution of that plan in the past.  Is the buyer’s vision for the future one that the seller believes aligns with the goals of its clients, advisors, and employees?

Capital Structure and Organization Chart
Review the organizational chart and roles of the buyer’s management team, how will the seller’s executives and management integrate into the organization chart.  Review the capital structure, especially if you are receiving equity, what are the different classes of equity? what are the rights, liquidity, and risk of the classes of equity?  How does equity rights affect your valuation and timing of any payout on the transaction?

Financial Statement
Has the buyer demonstrated growth? What are the drivers of the revenue? What are the significant expense?   What risk do the financial statement show i.e., revenue concentration, market risk, loan to equity ratio, cash flow, etc.?

Loans and Terms
Loans should be reviewed alongside the capital structure and ownership table.  What is the leverage of the business, will your deal payout (cash or equity) be subordinated to any other member capital or loan commitments?  What is the payment schedule of any equity or loans to be paid out ahead (based on time) of your deal installment payments or any back-end compensation or bonus that may be payable to the seller?  Sellers will want to evaluate the risk that the buyer may have substantial outflows that take priority over amounts due or contingently due to the seller.

Review of client reporting, operations, compliance, systems, and discussions with other recently acquired advisors, how will the seller integrate into the combined firm? Will client service and reporting needs continue to be met?  How will the firm culture, compensation model and benefit offering effect advisors and staff?  Does the combined firm expertise, service offering, and marketing plan benefit client needs and employee career growth?

Reciprocal due diligence is an important part of the sales  process, and the sellers deal team needs to spend substantial time on it to help in the determining if the buyer “qualifies” to meet the seller’s goals including valuation, deal realization, culture, retention and sustainability for your client and employee needs and growth.

One final potential benefit to review during reciprocal due diligence is if the seller has a service, platform, operation, or expertise that is greater than that of the buyer, a hidden value that you hope to uncover during reciprocal due diligence, to strengthen your negotiations.


The due diligence process is important to both the buyer and the seller.  The due diligence request and response to that request should not be looked at as a “data dump” and left to each party to fend for themselves, but rather an interactive exchange of materials to learn about each other’s business.  Due diligence can affect the valuation, deal terms, integration plan and perhaps even the deal itself.  Each side should use their due diligence to evaluate the post transaction combined firm and construct a deal that reflects the appropriate value and path to realize that value.

Prepare Now

Prepare now, while the market is hot.  RIA owners should start to prepare for a sale.  Start by reviewing your financials, operations, compliance, infrastructure, and other areas throughout your firm.  Are you ready to respond to comprehensive due diligence request?  Start by outlining the areas and workflow of your business and building supporting documentation that will fairly, and completely present your business to potential buyers.

Please see our related blog post

Selling Your RIA
Part 1: Sales Process and Pre-Sale Planning
Part 2: Building your Deal Team
Part 4: Valuation and Hidden Value

Simply stated, how long will demand last?

Help is Available

We know you are busy advising clients, running and growing a business, if we can help be a seat at your table, roll up our sleeves and work with your management and staff to presale prepare please contact Four Leaf Business Consulting, see  “We will help you consider, prepare and analyze the sale of your business, working with and for you while you concentrate your efforts on servicing your clients. “