Mergers and acquisitions (M&A) activity in the RIA industry has been on the rise in recent years, and minority stake investments have emerged as a popular option for both buyers and sellers. In a minority stake investment, the buyer acquires a partial ownership stake in the company, rather than a controlling interest. This can be an attractive option for both parties, as it allows the buyer to invest in a company without the full financial and operational commitment of a majority stake acquisition, and the seller to retain control and continue to operate the business.
Benefits of Minority Stake Investments
There are several benefits to minority stake investments for both buyers and sellers. For the buyer, a minority stake investment can be a lower risk and lower cost option compared to a majority stake acquisition. It allows the buyer to test out the investment and see how it performs before committing to a larger investment. Additionally, the buyer may have the opportunity to gradually increase their ownership stake over time.
For the seller, a minority stake investment can provide a source of capital to fund growth or support operations without giving up control of the company. It can also provide an opportunity to bring in an experienced partner who can bring expertise, connections, and other resources to the table. RIA owners with a high growth firm, a solid brand, scalable infrastructure and a 5-10 year runway are potentially a great fit for a minority stake sale.
Drawbacks of Minority Stake Investments
While minority stake investments have their benefits, there are also drawbacks to consider. For the buyer, the most significant drawback is that they may have less control and influence or the company compared to a majority stake acquisition. The buyer may also have less access to financial information and may be limited in their ability to make certain decision about the company.
For the seller, the main drawback is that they are giving up a portion of ownership in their company at a discount for the minority share. Sellers will often make this trade with the expectation that they will realize a larger exit in the future, once they have leveraged the expertise of their new partner to grow their business beyond where they would have been able to grow it on their own.
If you are an RIA considering a minority stake investment, the team at Rise Growth Partners would love to connect.