Investment Manager M&A: Utilizing a Partner Scorecard
By CEO of Shelton Capital Management, Steve Rogers
You’re just a couple years out from retiring, and the substantial task of a transition is pressing. And each day seems to end before you’ve focused your energy, picked up the phone, or moved the ball forward. And like the day before, you quietly commit to making progress tomorrow, or maybe next week. Today’s note is on building an investment manager Partner Scorecard for evaluating alternatives during the M&A options. If done properly, it will be a handy reference as the complexity of the decision builds over time.
I’ve outlined the following considerations that I have seen contribute to or complicate a transition. You should add to this list if there are other items specific to your firm. The card will overweight items that you identify as important. A score by itself might not be helpful, unless it’s exceptionally good or bad. However, using the scores to compare two or more options might yield important insights.
Culture Fit
Culture fit is an important factor in any transaction and becomes more important when the expectations are that you or your staff become contributing members to a buyer. You should expect your transaction to be a multi-year earnout, and the diligence team is sure to ask about your long-term commitments. Whether your time is behind a Bloomberg every day or a more casual oversight role, you’ll likely be involved for three or four years, minimum. Additionally, if you expect your staff to move over with the transaction, a culture they can thrive in will also help keep your clients at the new shop.
Firm Size
The size of the buyer may impact several factors critical to long-term success. Size impacts the buyer’s resources available for transition execution, client support, legal, and compliance. At the same time, larger firms come with more complex organizational structures, which can pose their own challenges. Additionally, jobs at larger firms are more focused. Your star employee who does sales, marketing and client support might have to choose because reporting lines are unique.
Financial Resources
A firm with strong financial resources and capital is better positioned to weather economic downturns, invest in growth opportunities, and provide stability to its clients and employees. Additionally, the acquiring firm must have sufficient financial and legal resources to complete the transaction and support the integration process.
Transaction Experience
Transaction experience refers to the acquiring firm’s history and expertise in completing similar transactions. A firm with a strong track record of successful mergers and acquisitions is more likely to navigate the complexities of the transaction process effectively. If you have mutual funds or a large number of separate accounts, this might become substantially more important to you because of the notification and approval process.
Capabilities in Legal, Marketing, Investment Management, Sales, and Compliance
All sellers ask about distribution and sales capabilities, and this is important. A firm that has invested in a robust CRM and marketing automation has probably made a lot of other important investments to ensure growth. Additionally, if wealth managers are your customers, you may prioritize a firm with a sales team already focused on that channel. The capabilities of the acquiring firm in areas such as compliance, operations, and legal can prove important as well, and these are not to be ignored. A firm with a dedicated chief compliance officer, or one that has engaged a nationally-renowned firm, is more likely to have a strong compliance program than one where a non-compliance professional took on these responsibilities. Similarly, a firm with a robust legal support team, either internal or external, is likely to have received good legal advice over time, thus reducing legal and regulatory risk. Finally, a strong operations team can ensure a smooth transition for your clients. In the case of moving or consolidating mutual funds, an experienced administration team can save a shocking amount of money.
Product Fit
Are you adding a new product to a firm’s lineup or consolidating similar products to gain scale? Are the products complementary? Are you in the same business? For example, an investment management firm needs to carefully consider selling to a wealth management shop when that buyer would be a direct competitor to your existing customers.
Customer Base
The customer base ideally enhances your opportunity set. A focus on what channel the buyer’s customers are in, and how that complements your product, will help you determine if you’re moving in the right direction.
Distribution Strategy
A well-defined and effective distribution strategy can improve client satisfaction and drive asset growth. You should evaluate the distribution strategy of the buyer and consider how it fits for a firm your size. How would the combined firm impact the evolution and growth of the sales effort? What channels are they focused on and how does this fit with demand for your product?
Customer Expectations
Finally, understanding and managing customer expectations is essential for a successful transaction. Clients of the firm being sold may have concerns about the impact of the merger on the quality of services, the continuity of their relationships, and the overall stability of the people and firm. The acquiring firm must be able to communicate effectively with clients to address their concerns and outline the benefits of the merger.
Company Reputation
I’ll attribute this to Warren Buffett, but many people know this fact and have said the same thing: you can’t do a good deal with a bad person. This is so important that it’s not a factor on the scorecard.
So now the scorecard. Rank each factor on a scale from 0–5, 5 being a very important issue and 0 being not relevant.
| Firm Name: | Your Score (0–5) | Factor | Score |
|---|---|---|---|
| Culture Fit | x 5 = | ||
| Firm Size | x 5 = | ||
| Financial Resources | x 5 = | ||
| Transaction Experience | x 5 = | ||
| Marketing Capabilities | x 5 = | ||
| Compliance Capabilities | x 5 = | ||
| Legal Capabilities | x 5 = | ||
| Sales Capabilities | x 5 = | ||
| Investment Management | x 5 = | ||
| Product Fit | x 5 = | ||
| Customer Base | x 5 = | ||
| Distribution Strategy | x 5 = | ||
| Customer Expectations | x 5 = | ||
| Total: |
Want to have a conversation or not sure how to range these? Reach out and let’s talk.
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