Published April 5, 2017
Growing your advisor firm through mergers and acquisitions can be an effective growth strategy, allowing you to capture more clients and additional assets. Selling a book of business can also be an attractive succession plan, helping advisors who may need a flexible retirement solution. Acquisitions have been gaining in popularity over the last few years as an opportunity for growth. In 2016, M&A transactions rose 30% to a record 641 deals total, with 123 of those belonging to the independent financial advisor segment.
Successfully acquiring a practice requires a great deal of forethought and planning. If you’re an advisor considering buying a book of business, you immediately think about how you could obtain the capital to make the purchase. You should also consider your current firm and its capacity to serve additional clients. What would happen to the exiting financial advisors’ staff? Who will manage all the new clients as the selling advisor transitions out?
In an industry where the majority of advisors are within a few years of retirement and executing their succession plans, acquisition presents a significant opportunity. However, too often the deal goes sour. Revenue stalls, clients leave, and staff become plagued with anxiety and a lack of productivity. Why?
Top Reasons Advisor Acquisitions Fail
Most acquisitions fail because the two firms were not a strategic fit in one manner or another.
- The seller and buyer cannot agree upon a price. The seller is likely to think the business is worth more than it is. We recommend engaging with an outside expert prior to engaging in the sale process. If there’s one thing you can do to ensure the success of a deal, it’s getting the pricing and the deal structure right.
- Changing leadership. The staff of the selling firm may not be inclined to stay or like the new owner. This is a risk because often they have as much at stake in the relationship with the clients as the advisor. It is just as crucial to get to know the staff as it is to know the selling advisor. Down the road this will be extremely helpful in navigating the challenge of client retention.
- Personality and/or management conflicts. Trying to acquire a firm that has a different management style or a conflicting way of managing money will be much more difficult. It can take time to find the right fit with a compatible firm.
What a Successful Advisor Acquisition Looks Like
You want to do everything you can to make the transition as smooth as possible and avoid a loss of revenue momentum. Let’s say that an elder advisor decides to sell a book to another local advisor. They get a business valuation done and agree upon a price. The purchasing advisor pays the selling advisor 30% up front and will pay the remainder over a five-year period. In this scenario, the purchasing advisor borrows the money through his broker-dealer at a very low interest rate. The selling advisor moves into the buying advisor’s office, and they communicate the change effectively to the clients. In five years, the selling advisor retires and his clients are well taken care of.
In the scenario above, you see that the transactional aspects of the deal were agreed upon early and went smoothly. But the real success lies in the five-year period when the buying and selling advisors worked together to successfully transition and merge the two firms together.
What Can You Do to Avoid Acquisition Failure?
Much of what causes a failed acquisition can be avoided if you properly evaluate the risk and compatibility of the deal before you ever engage in the buying process. Consider your objectives, both personal and for your business. What is your motivation for acquiring a firm? Are you growing just for the sake of having a larger organization? Mergers and acquisitions can be an avenue for accelerated growth, but they carry substantially more risk than organic growth strategies with existing clients.
Take the time to gather data and observe the selling firm. You’ll need to meet multiple times with the seller and the staff to understand the demographic of the new business and the opportunities it presents. Make sure the deal you are considering fits your client base. Is there a similar service approach? Do your investment philosophies align? Any red flags identified during this process will help you in mitigating risk and developing a plan for post-acquisition. Throughout the process from start to finish, keep rigorous documentation and consult your legal counsel.
Speaking of post-acquisition, the success of the deal is determined in the first 90 days after closing. Communication and an effective integration strategy are imperative to alleviating any anxiety both the staff and clients may have about the transition.
If you’re interested in acquiring a firm as a part of your strategic growth plan, take a look at a list of advisors within your geographical area that might be approaching retirement age. You can get this list from your broker-dealer or custodian. Ultimately, acquiring a firm takes tremendous planning and due diligence on your part and shouldn’t be taken lightly.