Untidy books and bad data can derail RIA deals

In a webinar earlier this month, Succession Resource Group advisers Kristen Grau, head of the firm’s seller advocacy listing program, and Nicole Frey, director of team solutions, addressed how financial records and client data affect registered investment adviser firm transactions.

They pointed out that firms with messy books and unverified client information tend to draw lower valuations, prompt longer due diligence and face a greater chance that a sale or merger will not close. Clean, comparable financial statements and verifiable client records can affect whether a transaction completes and how much an owner receives.

The presenters recommended that owners prepare historical and current financials and consolidate client information into sources a buyer can verify. They advised removing personal expenses from the business results, aligning owner compensation with market levels and confirming which assets and liabilities belong to the operating firm.

Grau warned that many advisers underinvest in data preparation because the work feels slow. ‘Sloppy books don’t just slow due diligence. They cost you money because uncertainty and a lack of organization gets priced as risk,’ Grau warned.

Frey recommended obtaining a certified valuation before pursuing a transaction. Frey noted a formal valuation can identify value drivers and risks before owners sit down with buyers and can be relevant when lending or tax matters are involved.

Owners must choose between selling outright and merging. SRG said a straight sale often provides faster monetization, lower short-term risk and a clear exit for owners without successors. A ‘sell and stay’ arrangement can reduce wealth-concentration risk while allowing the owner to continue working. A merger typically redefines ownership, governance, economics and decision-making and is commonly used to create a larger combined firm.

SRG outlined factors that can complicate mergers, including existing acquisition debt, different operational efficiencies that affect cash flow and mismatched expectations about partners’ roles. The advisers recommended agreeing on those issues up front and relying on verified financials and nondisclosure agreements during due diligence.

The presenters described the difference between an asset sale and an equity sale. In an asset sale a buyer acquires business assets and client relationships without necessarily taking on entity-level liabilities. In an equity sale a buyer purchases ownership stakes and generally assumes contracts and liabilities; that structure can support client retention but is less common because buyers often avoid inheriting liabilities. The choice affects tax treatment and negotiating leverage.

SRG advised owners to make their firms transferable by documenting processes, reducing dependence on a single person and consolidating client data. The firm said sellers should use valuations to assess key performance indicators and to identify risks or opportunities tied to potential partners.

SRG recommended addressing clean financials, verifiable client information and a formal valuation before seeking buyers or merger partners.