After a report yr for mergers and acquisitions in 2019 and a powerful begin in 2020, the COVID-19 pandemic has created a number of challenges for advisory corporations wanting exterior their organizations for development.
For one, lenders and potential deal companions may look askance at advisors who took loans beneath the Paycheck Safety Program, two executives say.
Three consultants on RIA M&As explored a few of these challenges on Wednesday, together with dangers each previous and new, that advisory corporations ought to take into account as they pursue development alternatives and succession planning this yr and past.
Potential PPP Issues
Advisory corporations that participated within the PPP may face potential new dangers on account of that call.
When the pandemic began, a number of advisory corporations seemingly spoke with their attorneys and accountants and concluded it was “prudent to take the money,” Rick Dennen, CEO and president of specialty lending agency Oak Avenue Funding, mentioned throughout the TD Ameritrade Institutional webcast “M&A and Succession in a Pandemic World.”
His agency had a few RIA clients who took half in this system and “I’m not going to take it or hold anything against them,” he mentioned. When his agency underwrites a loan, it seems on the agency’s stability sheet and, a yr from now or six months from now, if the loans are forgiven, the stability sheets can be enhanced, he famous.
Nevertheless, the PPP cash might be “not going to enhance the value of the business” and, maybe extra importantly, some will have a look at a agency taking a PPP loan as an indication that it’s “in distress and we can’t give them credit,” Dennen mentioned.
Like Dennen, David Barton, vice chairman, M&A pacesetter at RIA Mercer Advisors, wouldn’t personally “sit in judgment of anybody that’s taken a PPP loan — that’s a business decision,” he mentioned.
Nevertheless, when corporations certify they want that PPP capital to outlive, it’s “quite a statement that you’re making and you do have to disclose that on your Form ADV” that advisors should undergo the Securities and Alternate Fee, Barton mentioned.
Corporations also needs to remember that, on account of taking that PPP cash, “you’re essentially telling your own clients that ‘we’re in financial distress and we need to take a loan to keep the doors open,’” Barton mentioned. It’s “waters under the bridge at this point, but I’d be very careful about the decision to do that and then also … make sure you’re making the appropriate disclosures if you are doing that,” he suggested.
Powerful Marketplace for M&A Funding
In any case, some corporations may discover it harder to get funding proper now, Dennen mentioned.
“If you just look overall, it’s probably tougher from a commercial perspective for anybody walking in,” he mentioned.
“Banks are going to look at more current information” from corporations in search of funding, he identified, explaining: “Maybe in a typical world, they might have been, at this point in time … looking at year-end audits and maybe some quarterly updates through March. Whereas, in today’s world, we’re going to be looking for information through May: April and May results if it’s a May deal.”
The lending state of affairs has “certainly changed a little bit,” he mentioned, predicting that amongst “lenders that don’t have a good understanding” of the advisory agency sector, “you’ll start to see a pullback.”
Though his agency has been seeing a number of M&A exercise within the second quarter, he mentioned: “We’ve seen some of the smaller deals that might have been used for working capital, I would say, kind of got put on hold, I’m guessing, because of” the PPP. The Small Enterprise Administration stimulus program has “probably resolved some of the working capital issues” for some advisory corporations, he mentioned.
The latest M&A “deal flow that we’ve seen is coming from larger deals, and those are typically well-capitalized transactions,” he added.
Planning, Planning, Planning
Advisory corporations also needs to make sure that they’ve a enterprise continuity plan in place as a result of “a failure to plan is a plan for failure,” Barton mentioned, including: “They should also have a disaster recovery plan.” Each plans are really useful by the SEC and are “germane now in a COVID-19 world,” he pressured.
Pandemic or not, corporations ought to be sure that a merger or acquisition is worth the large period of time that can be concerned in a deal, Barton additionally advised.
In spite of everything, he mentioned, when “completing a transaction start to finish from negotiations to letter of intent to completing the purchase agreement, from completing all the schedules to that purchase agreement to doing the consent letter to doing the closing and the work in between, you’re talking months of labor.”
And it’s ‘very sophisticated, complex work, and it’s straightforward to mess it up,” he warned, including: “So be careful about what you undertake. If you’re thinking you’re going to buy the assets or the stock of a company, a firm that has $20 [million] or $30 million in AUM, that’s a pretty low revenue stream to invest that kind of time and energy.”
One potential various when a agency is pursuing a small firm that would make extra sense is to think about making a “lateral hire” kind of deal somewhat than an acquisition, he mentioned. A agency can conceivably provide to pay a portion of the opposite firm’s ebook of enterprise, with further cash, and “reward them for the transfer of assets” from one RIA to the opposite, he defined, including: It’s “a lot less work.”
Barton has not “seen any waning of interest” in advisory agency M&As because the pandemic began, he additionally mentioned, including: “In fact, I’ve actually seen the opposite. I’m seeing more firms coming to market and the velocity of deal flow increasing.”
Nevertheless, Scott Collins, managing director, gross sales consulting at TD Ameritrade Institutional, mentioned he heard from companions that “there was a little bit of a lull” in deal-making when the pandemic began, though that has “definitely picked back up” on the agency.
— Associated on ThinkAdvisor: