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  • Writer's pictureKevin Elvington

Special Considerations of Pursuing Minority Stake M&A Deals

Buyers and sellers must commit to one another through good and bad market cycles, knowing that a divorce could be messy and expensive.  


Lou Camacho - President, Stratos Wealth Enterprises

Despite industry media rumblings about the M&A headwinds of 2023 spilling into this year, countless RIAs and broker/dealers are actively pursuing deals. However, rather than an outright change of ownership, many are taking a closer look at minority stakes.  

Minority stakes come with a host of special considerations, including determining a reasonable valuation, doling out revenue streams equitably and ensuring advisors and clients stick around. Yet, perhaps the most critical factor is whether the parties can work well together, not just now but in the future. 

That’s because most disputes surrounding minority stake agreements center around control. Naturally, sellers will want to manage a business the way they always have, while buyers will crave a voice in how it operates. That makes it crucial for all parties to remain comfortable with the deal terms throughout the life of the partnership. 

Marriage Material

Ultimately, contracts are pieces of paper. It’s the people behind them that make the difference. Indeed, the reality of how—or whether—clauses regarding payouts, clawbacks, mutual indemnification and arbitration play out in the real world depends heavily on the convictions and behaviors of each deal partner. 

That’s why, in some respects, putting together a deal like this is akin to getting married. Buyers and sellers must commit to one another through good and bad market cycles, knowing that a divorce could be messy and expensive.  

In a perfect world, a minority stake transaction can meet the seller’s need for liquidity and a succession plan while supporting the buyer’s desire for added diversification. But our world is far from perfect, so there are two important things to remember before walking down the aisle together.  

First, just because someone is a good advisor doesn’t mean they run an effective business. Buyers need to understand the distinction. Does your prospective partner have a keen eye for managing P&L and cash flows? Do they offer a competitive advantage? And do they inspire the people who work for them to go above and beyond?

If not, keep shopping. Remember, not every business will get stronger after getting an influx of capital; only well-run ones do.  

Second, sellers should only partner with buyers with a strong track record of deploying capital effectively. On the surface, of course, that means they have a history of boosting firm valuations and empowering autonomy. But there’s a lot of hard work that goes into that. 

Ask buyers about the transition process and what kind of difference-making tech tools and platforms they would implement. Also, in this era when firms must spend additional resources to keep clients happy, inquire about which investment management and financial planning services they’ve had success with. Moreover, what about succession planning, compliance and marketing support? 

From Partial to Total

To be sure, some minority stake investments eventually spawn a second deal—one that results in a total change in ownership. The seller could be ready to retire or pursue new ventures. They could have gained confidence in the buyer after the initial investment. It’s also possible that no other buyer exists. 

Whatever the case, if the seller is ready to pursue a new venture, one path could be to take on added responsibilities within the buyer firm. Sophisticated advisors who have built their businesses can often help others expand existing platforms or launch subsidiaries for the buyer. This can pave the way for new geographies, products and services at the parent organization. 

Deal or No Deal?

Finally, you must be willing to say no. It’s perhaps cliché to say the most important deals are the ones you don’t make. But clichés gain steam for a reason—there’s often more than an ounce of validity to them. 

So, in the end, for buyers and sellers, that puts a premium on finding the right partner with the right business at the right time. That’s easier said than done.


Lou Camacho is President of Stratos Wealth Enterprises

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