First-Time Buyer Series: Your Criteria, Part Three: Merger?

In the past two weeks, we have discussed your criteria regarding the number of clients and the cash flow. Today, we look at your criteria from one element of the acquisition strategy.

There are a number of motives for purchasing a book of relationships. The most obvious ones are to gain additional clients, which in turn increases your revenue. Sometimes advisors decide to merge with future sellers to help scale for the future, while generating immediate income today. This brings up the question: “Are you willing to merge, or do you simply want to buy?”

Our buyer/clients often tell us that if an aging advisor wanted to join the firm for purposes of a succession plan down the road, this would be an acceptable arrangement. The seller is given a formula to apply, with which he/she will be able to determine when it is time to retire. Sounds like a great arrangement; the buyer gets what amounts to an override on business, and can claim additional AUM; the future seller has a guaranteed succession plan and can calculate the sale price. This can be an accretive strategy, but you certainly need to think about the unintended consequences of such an arrangement and set some “deal killer” criteria. Here are a few issues to consider:

• Does the merger partner, (MP), fit with our firm’s culture? Share our values? The wrong person can be very disruptive to a firm’s internal flow.

• How will our staff, clients, respond to the MP?

• Will the MP’s book of relationships fit into our long-term strategy for growth, or will the book cause us to change our service model? (Average client size for example.)

• Can we profitably service the MP’s book if he/she were to retire today?

• Does the MP share our investment philosophy?

• Where are the MP’s clients located?

There are hundreds of additional issues to consider. Keep in mind that this advisor (MP) may be someone who has run his/her firm for decades, his/her way. If he/she joins your firm, or comes “under your wing,” how will he/she respond to this? If you are a progressive firm that embraces technology, does he/she?

The above statements are not mentioned to discourage you from offering this as an option. The idea is to encourage you to give a lot of thought to what kind of arrangement you are willing to accept, and under what circumstances. You can save yourself and potential merger partners a great deal of time by not trying to fit a “square peg in a round hole.” You want to offer a certain amount of flexibility, but know what your deal killers are. Successful money managers, as well as successful real estate investors, and successful M & A practitioners all share at least one trait. They know when to say “No” and they do so long before they spend a lot of their precious time on something that will never work. In his book, Am I Being Too Subtle? Billionaire real estate investor Sam Zell says that he learned very early on that he could not see how real estate developers made money. He decided that at least 50% of the payoff was vanity, (he phrased it a lot more colorfully, but my Mom may read this). You have to decide early what your go/no-go’s are.

As we suggested in the last article, model situations to determine how you would judge the results. Work the numbers, but also think about the culture of your firm, your service model, and the parts of your business that you are willing to bend on, versus those that you are not. The merger strategy can be a great way to help build the AUM and revenue of your enterprise, but it comes with challenges. The more thought given to the consequences, the better you are prepared when an opportunity arises. Advisors like to work with colleagues who are prepared.

Casey M Corrie